Fed leaves door open for a June rate hike
Washington, May 19
A surprisingly bullish view from the Federal Reserve on the possibility of raising interest rates next month sent the dollar higher and stocks tumbling on Wednesday.
The minutes to the Fed’s late-April meeting showed central bank policymakers unexpectedly open to a rate hike in June, despite the first quarter economic slowdown and the looming British vote on exiting European Union.
Moreover, officials on the Federal Open Market Committee (FOMC) were worried that markets were not taking the June option seriously enough, as per the minutes.
Coming after two FOMC members said on Tuesday that they expected two to three increases this year, as early as the June 15 to 16 meeting, the contents of the minutes sharply raised expectations that that could happen.
“With today’s FOMC minutes, even the biggest sceptic won’t be able to dismiss the chance for a June hike any longer out of hand,” said Economist Harm Bandholz at UniCredit.
Market reaction to the release was sharp: share and oil prices sank while the dollar surged and Treasury bond yields jumped.
The Dow Jones Industrial Average, up 0.5 per cent before the minutes release, ended off 0.02 per cent, and the dollar surged 0.8 per cent to $1.1221 against the euro.
Market expectations of a June rate increase, based on CME rate derivatives, jumped from less than five per cent last week to about 34 per cent, and with a majority expecting an increase by July.
The Fed has repeatedly stated its intention to continue raising rates this year after December’s first hike in nine years. That prospect has already tightened money conditions for borrowers around the world and strengthened the dollar.
But with the economy slumping during the late winter and with leading central banks in Europe and Asia cutting rates to prop up sagging growth, FOMC has remained outwardly cautious. It opted at the end-April meeting to keep its benchmark federal funds rate unchanged at an ultra-low 0.25 to 0.5 per cent.
Some officials were still concerned over possible turmoil in global markets from China’s handling of its exchange rate and from the Brexit referendum in Britain, which takes place a week after the June policy review.
But the minutes showed the panel was more confident in the economy and the possibility of moving in June, if economic data continues to improve, than investors had understood from the policy statement.
And FOMC members were worried that the market was not getting that message.
“Some participants were concerned that market participants may not have properly assessed the likelihood of an increase in the target range at the June meeting,” the minutes said.
“They emphasised the importance of communicating clearly over the inter-meeting period how the Committee intends to respond to economic and financial developments.”
FOMC members stress the need for economic data to confirm the economy is growing firmly, and with four weeks before the next meeting, views could change.
Recent numbers on inflation, output and consumption have been strong, but others on the employment market have weakened, leaving some questions in the air, economists note.