Federal Reserve policymakers largely agreed when they met last month that it would be too early to start raising interest rates in June, as they debated whether the economy’s winter weakness would fade or persist.
While “a few” Fed officials believed that the U.S. economy would be ready to raise rates in June, they were outnumbered by “many” Fed officials who viewed it as “unlikely” that the economic data would be strong enough to justify a hike next month.
The divergent views were revealed Wednesday in the minutes of the central bank’s discussions at their April 28-29 meeting. The Fed has kept its key rate near zero since December 2008.
Many economists at the beginning of the year pegged June as the most likely date for the first rate hike. But private analysts have now pushed that liftoff date to September or even later given unexpected weakness at the start of this year.
“The Fed is still in wait-and-see mode,” said Paul Ashworth, chief U.S. economist at Capital Economics.
While rates may not rise as much or as quickly this year as he had initially forecast, Ashworth said he still believes that rising wages and higher inflation will push the Fed to move more aggressively next year.
The Fed reiterated that the decision to raise rates will be based on data and considered on a meeting-by-meeting basis. It is unlikely to issue a separate notice when a rate hike is imminent. Policymakers said the public could instead look to its description of the economy in its regular post-meeting statements for clues on the likely timing of a rate hike, according to the minutes.
Financial markets took the Fed minutes in stride, although a brief afternoon rally faded, leaving the major indexes mixed. The Dow Jones Industrial Average finished the day down 27 points at 18,285, while the Nasdaq composite index was up slightly.
The minutes showed that Fed officials are concerned about market reaction once they do start raising rates, especially as bond-price “volatility may be greater than it had been in the past.” Some officials worried about triggering a sharp rise in bond rates, similar to the spike that occurred in June 2013 when the Fed first discussed the possibility of trimming its monthly bond purchases.
The overall economy, as measured by the gross domestic product, grew at a meager rate of just 0.2 percent in the January-March quarter. The figure could well be revised by the government next week to show that the economy actually contracted during the period.
In its policy statement issued after the April meeting, the Fed blamed the deceleration on “transitory factors” such as severe winter weather and a now-resolved labor dispute at West Coast ports. But the minutes of the discussion show that officials debated just how temporary the slowdown might be.
It cited a number of officials who felt that the strong dollar’s impact on exports or the effects of cheaper oil on business investment “might be larger and longer-lasting than previously anticipated.”
Some officials also noted that lower energy prices have yet to fuel consumer spending, while others said the downside risks to growth had risen since the Fed’s March meeting.
But policymakers who were confident that the economy would regain momentum pointed to a consistent seasonal pattern in recent years: The economy is generally weaker in the first quarter before rebounding in the spring and summer. They also underscored fundamental strengths of the economy such as low interest rates, solid consumer confidence and rising household income.
The Fed next meets on June 16-17.