Federal Reserve officials are looking more confidently toward an
interest-rate increase before the end of the year, possibly as soon
as September, as financial markets have stabilized after Britain's
vote to leave the European Union and the economy shows signs of
picking up.
Policy makers at the central bank are almost certain to leave
rates unchanged when they meet July 26-27, according to their
public comments and interviews with officials.
But the message in their postmeeting policy statement could be
that the economy is on a more solid footing than it seemed to be
when officials last gathered in June, setting the stage for raising
interest rates if economic data hold up in the months ahead.
Such a message would get the attention of futures markets, which
view the chances of the Fed making a move by September as low. In
early June, traders on the Chicago Mercantile Exchange put a
probability of greater than 60% on the bank raising short-term
rates by at least a quarter percentage point as soon as September,
according to the CME. But that chance dropped sharply after a weak
May jobs report and the June 23 Brexit vote, standing at just 12%
on Monday before rising to 18% on Tuesday.
Stock markets initially fell but later bounced back after the
Brexit vote, with U.S. indexes hitting record highs and the dollar
stabilizing. Moreover, the June jobs report was better than
expected, putting a September move by the Fed back on the
table.
Many officials have said they can be patient before raising
rates again, meaning a July move is highly unlikely. But new rounds
of strong economic data—particularly on hiring or an uptick in
inflation—could increase their sense of urgency in the months after
their meeting next week.
Atlanta Fed President Dennis Lockhart, a centrist at the central
bank whose views often represent a middle ground among officials,
told reporters last week it remains likely the Fed will raise rates
this year, adding, "I wouldn't rule out as many as two"
increases.
Markets had been "quite orderly" since the Brexit vote, he said,
and turbulence leading up to and right after the British vote "does
not seem to have caused direct harm to the country's economy."
"We should be looking toward removing accommodation," Robert
Kaplan, president of the Federal Reserve Bank of Dallas, said in an
interview last week at the Official Monetary and Financial
Institutions Forum. "We just should do it in a patient, gradual
way."
The Fed raised its benchmark federal-funds rate last December to
a range between 0.25% and 0.5% and has held it steady since
then—despite warnings it would raise rates again—amid bouts of
uncertainty about the global economic outlook and turbulence in the
financial markets.
Officials will be reluctant in their policy statement next week
to signal when the next rate increase is coming. They still face
uncertainty about the economic outlook. Moreover, an eight-week
stretch will pass between their July meeting and the Sept. 20-21
gathering, during which two more jobs reports and a slew of other
data will be released.
Fed officials tried to nudge market expectations for a rate move
earlier this year, with embarrassing results. Minutes of their
April policy meeting, as well as comments by officials in April and
May, suggested a rate move in June or July was on track. Then the
weak May jobs report and Brexit vote put the Fed on hold, and
expectations for a July rate increase tumbled.
Officials could signal a more upbeat assessment of the economy
after they meet next week, while keeping their options open on
rates.
At their June gathering, they said the pace of labor- market
improvement had slowed and job gains had diminished. Since then,
the Labor Department has reported employers added a healthy 287,000
jobs in June. One way to signal more optimism would be to upgrade
their assessment of the job market.
"We're basically at full employment," Loretta Mester, president
of the Cleveland Fed, said in a recent interview with The Wall
Street Journal. She added, "I think the underlying fundamentals
remain very solid for the U.S. economy."
Jobs will be a wild card for the Fed over the next two months.
Monthly payroll growth averaged 147,000 in April through June, a
slowdown from monthly growth of over 196,000 in the first quarter
and 229,000 in 2015.
If payrolls stay on a slower track, officials could decide to
delay a rate move until year-end or even next year, but a shift
back to monthly payroll gains near 200,000 could lead them to move
by September.
Meantime, Fed Chairwoman Janet Yellen could face divisions as a
decision about rates approaches. Though officials like Ms. Mester
have expressed support for raising rates, others are urging the Fed
chief to proceed with extreme caution.
" This is not an economy that's running hot. This is not the
late '70s," Fed governor Daniel Tarullo said in an interview with
The Wall Street Journal earlier this month. "I have thought that it
was the better course to wait to see more convincing evidence that
inflation is moving towards and would remain around the 2% target"
before raising rates again.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com and Michael S.
Derby at michael.derby@wsj.com
(END) Dow Jones Newswires
July 20, 2016 01:35 ET (05:35 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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