December Fed hike odds barely budge after FOMC minutes

Mike Powell  Getty Images
Mike Powell Getty Images
Author

06 July, 2017

Federal Reserve officials are discussing a timeline to begin cutting the central bank's $4.5 trillion portfolio, according to minutes from their June meeting. The minutes show a Fed divided between officials comfortable with the unemployment rate undershooting their estimates about the sustainable level and those who fret that "a substantial and sustained unemployment undershooting" could trigger inflation or financial instability.

United States central bankers are divided over the near-term risk of inflation and disagree over the timing of interest rate hikes into next year, minutes of the last Federal Reserve meeting showed Wednesday. Inflation, in particular, has proved hard to nudge closer to the Fed's 2 percent target, while in the first three months of the year the economy grew at a rate of only 1.4 percent. The Fed's favored inflation measure, the core personal consumption expenditure index, grew just 1.4 percent at an annualized rate in May, below the rate that the Fed targets.

The Fed voted in June to raise short-term rates by a quarter point to a range of 1 to 1.25 percent, the third quarter in a row the bank has lifted rates.

The slow start to the year has led some economists to caution against additional interest rate hikes this year. Fed officials viewed weakness in inflation, as well as slow GDP growth recorded in the first quarter, as "transitory" developments.

Still, the decision to reduce the Fed's holdings came across as a sign of optimism for an economic recovery embarking on its ninth year. Meanwhile, U.S. officials will soon confront the challenge of raising the debt ceiling to continue to fund the government.

The Fed's next meeting is July 25-26. With the U.S. economic picture beginning to show cracks, there is reason to believe a September rate hike may not be advisable.

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Financial conditions were also debated at the meeting, with some participants arguing that "increased risk tolerance" among investors could be lifting asset prices.

The Fed's preferred measure of underlying inflation slipped again in May to 1.4 percent, the Commerce Department reported on Friday, and has run below target for more than five years.

Yellen said last month that asset valuations look "somewhat rich" using traditional metrics like price-earnings ratios.

In a press conference at the time, Fed Chair Janet Yellen described a recent decline in inflation as temporary and the central bank kept its forecast of one more rate rise this year and three the next.

Because of the markets' performance and subdued volatility, a few Fed officials expressed concern about "a buildup of risks to financial stability".


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