Conditions for Federal Reserve rate hike ‘are approaching’

Minutes of a meeting published last night show that US Federal Reserve officials in July said that while conditions for raising interest rates were approaching, they saw more room for labour market healing and need more confidence that inflation is moving towards their goal.

Most participants “judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point”, according to minutes of the July 28-29 Federal Open Market Committee session.

The details come four weeks before the Fed’s September meeting, when most economists forecast the central bank will raise its benchmark interest rate for the first time since 2006.

Policymakers say a decision to raise rates will hinge on continued improvement in the labour market and confidence that inflation will rise.

“Almost all members” indicated that “they would need to see more evidence that economic growth was sufficiently strong and labour markets conditions had firmed enough for them to feel reasonably confident that inflation would return to the committee’s longer-run objective over the medium term,” the minutes state.

Officials last month left the benchmark federal funds rate near zero and said it will be appropriate to begin tightening policy once they have seen “some further improvement” in the labour market and are reasonably confident that inflation will move up towards their 2% objective.

The addition of the modifier “some” was the only change to their language on conditions that would warrant a rate increase.

According to 77% of economists in a Bloomberg survey taken August 7-12, the Fed will act at its September 16-17 meeting.

The market is less confident, with investors yesterday forecasting a 40% chance the Fed will tighten next month, based on pricing of federal funds futures contracts.

The odds assume the effective rate will rise to 0.375% after lift-off.

The labour market has shown continued progress since the committee meeting, with US firms adding 215,000 jobs in July compared with the year-to-date monthly average of 211,000.

Inflation, by contrast, remains subdued.

The Fed’s preferred gauge hasn’t been above the committee’s 2% goal since April 2012 and rose 0.3% in the year through June.

Another inflation measure, the consumer price index, rose less than forecast in July, a report showed yesterday.

“It was noted that considerable uncertainty remained about when wages might begin to accelerate and whether that development might translate into increased price inflation,” the minutes said.

Still, “most” officials expected that downward pressure on inflation from declines in energy prices and a stronger dollar “would prove to be temporary”.

US stocks fell in choppy trading as the minutes were released. The Dow Jones industrial average fell 159.94 points to 17,351.4, the S&P 500 lost 17.11 points to 2,079.81, and the Nasdaq Composite dropped 40.30 points to 5,019.05.