Advertisement

Fed likely to raise interest rates in June if economy keeps improving

Fed likely to raise interest rates in June if economy keeps improving
Federal Reserve chief Janet Yellen speaks in March. (Manuel Balce Ceneta / Associated Press)

Catching many investors off guard, the Federal Reserve made clear Wednesday that an interest rate increase in June is likely if the economy keeps improving.

The minutes of Fed officials' meeting in late April show they widely felt it would be time to raise rates at their June 14-15 meeting as long as hiring and economic growth further strengthened and inflation showed signs of accelerating.

Advertisement

The Fed had voted, 9-1, in April to keep rates unchanged while noting that threats from the global slowdown had eased.

Given the suddenly increased likelihood that the Fed will raise rates at its next meeting, stocks turned lower and bond yields jumped after the minutes were released at 2 p.m. Eastern time.

The minutes said that some Fed officials did express concerns at the April meeting that the economic data might not be clear enough by mid-June to determine whether a rate hike was warranted. But this view was balanced against other officials' belief that the data would prove consistent with a June hike.

Even at the April meeting, Fed officials were encouraged by developments in the U.S. economy and financial markets, the minutes showed. Several participants suggested that the risks to the economic outlook were now "roughly balanced."

The Fed had last signaled its belief that risks were balanced in December, when it hiked rates for the first time in nearly a decade, from record lows near zero. But after turbulence struck financial markets and the global economy weakened, the Fed removed that assessment from its descriptions of the economy and held rates steady.

Until now, many economists have assumed that the Fed would leave rates alone at its June meeting. Some had noted that the Fed would meet just a week before Britain votes on whether to leave the European Union — a possibility dubbed Brexit — and that the central bank might want to avoid destabilizing markets with a rate increase.

"June is very much alive, but Brexit remains a big hurdle," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Yet the Fed might want to go ahead with another rate hike, given signs that the economy has been recovering in the second quarter after nearly stalling in the first three months of the year. Analysts say they think annualized growth in the current quarter will accelerate to about 2% or better.

In addition, inflation, which has been running below the Fed's 2% target for four years, has shown signs of accelerating as energy prices rebound from a steep drop at the beginning of the year. The government reported Tuesday that the consumer price index jumped 0.4% in April, reflecting higher energy costs.

In remarks this week, three Fed officials raised the prospects of a June rate hike.

John Williams, president of the Fed's San Francisco regional bank, called June a "live" meeting. Atlanta Fed President Dennis Lockhart said of the possibility of a June rate increase, "I wouldn't take it off the table."

Robert Kaplan, president of the Fed's Dallas regional bank, said Tuesday that "in the not-too-distant future," the Fed should be raising rates. Speaking in Midland, Texas, Kaplan said he may advocate for a move in June or July.

MORE BUSINESS NEWS

Advertisement

UPDATES:

12:56 p.m.: This article was updated with additional details and analysis.

This article was originally published at 11:31 a.m.

Advertisement
Advertisement