WASHINGTON, D.C.: US central bankers say it will “soon” be time to raise the key lending rate again, according to minutes from the last Federal Reserve meeting released Wednesday.
Monetary policymakers say they may wait, however, to see if weak growth recorded earlier this year was only temporary, which seems to open the possibility that the next rate increase could be delayed until after June.
Fed officials said planned spending by President Donald Trump’s administration could boost the economy more than currently forecast, although the details and timing of the projects “remain highly uncertain.”
Markets have become concerned, however, over perceived missteps by the Trump administration as US officials probe his campaign team’s possible collusion with Russia in last year’s elections — investigations they fear could derail planned tax cuts and deregulation measures.
Some central bankers also “expressed concerns” over the administration’s plans to ease bank regulations, which “could increase risks to financial stability,” according to the minutes.
At the May 2-3 meeting, the Fed’s policy-setting Federal Open Market Committee voted unanimously to keep the federal funds rate in a range of 0.75-1.0 percent, just as most analysts had expected, and downplayed the tepid GDP growth in the first quarter as mostly due to “transitory factors.”
Assuming the economy continues to perform as expected, with continued job and wage growth leading to a rebound in consumer spending and business investment, “most participants judged… it would soon be appropriate” to raise rates again, the minutes stated.
The central bank raised rates in March and December, amid a wave of optimism in the early days of Trump’s term, with his promises of tax cuts, deregulation and big infrastructure spending.
Doubts about timing
Most analysts expect two more rate increases this year, likely at the next meeting June 13-14, and again in September.
However, the minutes surprisingly cast some doubt on that schedule.
“Members generally judged that it would be prudent to await additional evidence indicating that the recent slowing in the pace of economic activity had been transitory before taking another step” to increase the benchmark interest rate.
At the same time, the central bankers largely discounted the weak first quarter — when GDP expanded by only 0.7 percent, the slowest in three years — as a one-time issue.
They emphasized the continued strong labor market and solid hiring, and noted, for example, that spending on energy slowed due to the mild winter.
Many economists also discounted the weak first quarter as an anomaly frequently seen in the first three months of the year, and continue to see the need for two more Fed rate moves, with the first one coming in June.
But Boris Schlossberg of BK Asset Management, said: “The Fed cast a doubt on even the possiblity of a June rate hike.”
However, other analysts largely ignored the unusual contradiction.
“The May FOMC minutes confirm that most members view the reported slowdown in Q1 GDP growth… as likely to be ‘transitory’ so they saw no need to shift their view that ‘gradual’ rate hikes likely will continued,” Ian Shepherdson of Pantheon Macroeconomics said in a research note.
The first chance to look at one key piece of data will be May 30, when the Commerce Department releases the personal income and spending report for April.
Fed officials say the economy also is expected to see a boost from overseas demand for US exports, as “the risks stemming from global economic and financial developments” have “receded further,” the minutes said.
Policymakers also reviewed a staff proposal on how to reduce the size of the Fed’s holdings of Treasury and mortgage-backed securities “in a gradual and predictable manner” so as not to roil financial markets.
The Fed already announced that it expects this year to begin unwinding its investments — part of the extraordinary “quantitative easing” used during the financial crisis.
Discussions will continue at the next meeting on the proposed plan.