US Federal Reserve expects to raise rates soon, minutes say

Fed officials meeting this month expected it would ‘soon be appropriate’ to raise short-term interest rates.

US Fed chair Janet Yellen at a G7 summit of finance ministers in Bari, Italy this month.

Federal Reserve officials at their policy meeting this month expected it would “soon be appropriate” to raise short-term interest rates, a signal the central bank could move in June at its next gathering.

The Fed also moved towards a consensus on a proposal to start shrinking its $US4.5 trillion ($6 trillion) in holdings of Treasury and mortgage securities later in the year, according to minutes of the gathering released yesterday. Under the approach discussed, they would allow increasing amounts of the securities to ­mature over time, without reinvesting the proceeds.

Fed officials left their benchmark short-term interest rates unchanged within a range between 0.75-1 per cent at the meeting on May 2-3. Several Fed officials in recent weeks have said they believe the economy will still be strong enough to warrant two more quarter-percentage-point rate increases this year.

Officials were inclined to stick to that scenario even though the economy appeared to stumble in the first quarter. They saw that slowdown as likely to be transitory. And while some expressed concern about recent softness in inflation, it was not enough to knock them off track.

The next meeting is June 13-14, followed by a press conference with Fed chair Janet Yellen.

“Most participants judged that if economic information came in about in line with their expectations, it would soon be appropriate for the committee to take another step” in raising rates, the minutes said.

Before the minutes were released, “we thought there was a pretty good chance” of a rate ­increase in June, said Michael Feroli, chief US economist at JPMorgan Chase. “Saying ‘soon’ says that that is the committee’s intention, as well.”

Markets edged higher after the release of the minutes, which did little to change investors’ view of the rate outlook. The Dow Jones Industrial Average rose 0.36 per cent to 21012.42. The yield on the benchmark 10-year US Treasury note fell to 2.266 per cent, from 2.285 per cent.

Traders in futures markets think there is an 80 per cent chance of a Fed rate increase by next month.

Officials expected job gains, rising household income and wealth, and buoyant consumer sentiment to bolster spending in the months ahead, and they took greater comfort in improvements in the housing market and business investment. Inflation has wobbled in recent months, a cause of concern for some officials, but a threat most were prepared to look past for now. Officials generally believed the deceleration in price pressures would prove temporary.

The uncertainty around the inflation outlook stands in contrast to labour markets. The April employment report, released days after the recent Fed meeting, showed steady hiring, with an average 185,000 jobs added monthly so far this year. The unemployment rate fell to 4.4 per cent, at the bottom range of expectations. The rate hasn’t been lower since May 2001.

Some officials at the meeting said stronger hiring and wage gains and larger declines in the unemployment rate could warrant a faster pace of rate increases, but a few said the Fed could move more slowly than projected if continued declines in the unemployment rate didn’t create obvious price pressures.

The central bank’s discussion about how to wind down its portfolio, also known as its balance sheet, has picked up because the economy is moving closer to meeting the Fed’s goals of steady, low inflation and maximum, sustainable employment.

Officials stopped adding to the balance sheet more than three years ago, but they have been reinvesting the proceeds of maturing assets to keep their holdings steady.

Those reinvestments have helped to hold down long-term interest rates, and allowing them to roll off without reinvestment could push up long-term rates.

A Fed staff briefing on the latest proposals to shrink the holdings suggested tapering re­investments of Treasury and mortgage securities by allowing a preset dollar amount of holdings to run off every month — that is, by not reinvesting their proceeds.

The amount of securities allowed to run off would initially be relatively small, and the Fed could then increase those amounts every quarter. “Nearly all” officials agreed with this approach, which they believed would accomplish their goal of reducing the holdings in a gradual and predictable way, the minutes said.

Officials want to avoid a rerun of the 2013 “taper tantrum”, when investor concerns over the Fed’s decision to slow the pace of asset purchases roiled markets.