Fed minutes keep September interest rate hike in play

Federal Reserve Chair Janet Yellen, left, presides over a meeting of the Fed board of governors in Washington.

Federal Reserve Chair Janet Yellen, left, presides over a meeting of the Fed board of governors in Washington.

(Manuel Balce Ceneta / Associated Press)
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It looks like a toss-up whether the Federal Reserve will hike its benchmark interest rate next month.

An account of the Fed’s last meeting in July, released Wednesday with the usual three-week lag, indicated that “almost all” policymakers wanted to see further improvement in the job market and inflation outlook before making their first rate increase in nine years.

The economic data made public since that meeting have been decidedly mixed.

Although job growth remained solid in July, wage gains have been moderate, and inflation last month, reported separately by the government on Wednesday, continued to sag well below the Fed’s 2% target.


Home-building in the U.S. is showing signs of picking up, but concerns are growing about China’s slowdown and the impact on the global economy and commodity prices, trends that could put downward pressure on both economic growth and inflation.

“The divide between those on the [Fed’s policy committee] who would like to raise rates in September and those who would prefer to wait is widening,” Diane Swonk, chief economist at Mesirow Financial, said about the Fed minutes.

“This is to be expected given the ambiguous conditions the Fed has given us for liftoff,” she said, referring to the timing of the central bank’s first hike in its federal funds rate in nine years.

“There is nothing clear-cut about the Fed’s requirements that labor markets need to improve a bit and the idea that members need to feel ‘confident’ in a forecast that inflation will return to the Fed’s 2% target over the medium term.”

Swonk said she saw “nothing in the Fed minutes alone to stop liftoff in September,” but she also rattled off a list of possible issues that, between now and the Sept. 16-17 meeting, could hold back policymakers.

Among them: further strengthening of the dollar, which is bad for U.S. exports and inflation; a poor jobs report for August; more financial market turmoil; and fears of a deeper slowdown in China, the world’s second-largest economy and major driver of global growth.


“No matter how impatient the market or Fed officials are to get ‘things going,’ it is all about the data,” said Lindsey M. Piegza, chief economist at Stifel Nicolaus & Co, a brokerage firm. For her part, she said, “the economy needs more time to improve further.”

That was clearly the dominant view of Fed policymakers during their July 28-29 meeting, according to the minutes

They agreed that even though the economy has been expanding “moderately” and generating jobs at a solid pace, many still wanted to see further evidence of an improving labor market and sustained economic growth — both major determinants in the path of inflation.

“Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point,” the minutes said.

While the debt crisis in Greece has eased somewhat, Fed officials are keeping a close eye on China.

“Several participants noted that a material slowdown in Chinese economic activity could pose risks to the U.S. economic outlook,” according to the minutes.


Their concerns about China are likely to be even higher since Beijing’s sudden devaluation of its currency last week, something that some analysts believe was aimed at boosting China’s flagging exports.

A cheaper Chinese yuan also could press down prices of imported goods in the U.S., aggravating the unusually low inflation.

On Wednesday, the Bureau of Labor Statistics said consumer prices increased a measly 0.2% in July from 12 months earlier, reflecting the big drop in oil prices over the last year.

Though small, the July figure was up from the annual rate of 0.1% for the year through June, and it was the third-straight month that the annual rate has increased.

A 5.6% decline in airline fares last month, the biggest decrease in 20 years, helped hold down overall consumer price growth, the bureau said. But Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted that the drop in airfares probably would be only temporary. What’s more, housing rents, a big component of the overall consumer price index, have been rising rapidly.

An index of core consumer prices, which excludes volatile energy and food items, was up 1.8% for the 12 months ended July 31, the same as the previous month.


The Fed uses a different inflation measure based on personal consumption expenditures, which was up 0.3% for the 12 months ended June 30, the latest available data. Core inflation, using that barometer, was 1.3% for the same period.

Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, a nonvoting member of the Fed’s policymaking group this year, argued Wednesday that it would be a mistake to raise interest rates soon.

A higher interest rate could damage the economic recovery and is not needed with inflation running so low, he said in an opinion column in the Wall Street Journal.

“The U.S. inflation outlook ... provides no justification for policy tightening at this juncture,” said Kocherlakota, who believes inflation concerns should be secondary to promoting job growth.

But other Fed policymakers, including Federal Reserve Bank of Atlanta President Dennis Lockhart, who is a voting member, recently indicated that he was ready to pull the trigger, barring a major deterioration of economic data.

Such divided opinions have left many investors as muddled as ever.