Only "a few" participants expect economic data will show sufficient improvement to warrant a rate hike increase at the Federal Open Market Committee's June meeting, according to minutes of its April meeting, released Wednesday.
While there was clear agreement that further labor market improvement and confidence of reaching 2% inflation over the medium term are the keys to rate hikes, "participants expressed a range of views about when economic conditions were likely to warrant an increase in the target range for the federal funds rate," the minutes said.
"Many participants," the minutes said, deemed it "unlikely" that data through June will "provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied, although they generally did not rule out this possibility."
While the panel discussed a statement saying rates are likely to go up "in the near term," the majority believed the decision will be on a meeting-by-meeting basis, with economic conditions and the outlook determining the appropriate time for liftoff.
The panel discussed "different concepts of the equilibrium real federal funds rate - that is, a reference value of the inflation-adjusted federal funds rate consistent with the economy achieving, over a specified time horizon, maximum employment and price stability."
While these measures are "highly uncertain, some participants" said "their estimates were currently unusually low by historical standards," according to the minutes. "In light of their low estimates, a few of these participants questioned whether the Committee was providing sufficient accommodation at the present time and cautioned against initiating policy firming in the near future."
Others offered specifics to refute the belief "that the equilibrium real federal funds rate was particularly low."
While some wanted further discussion of the topic, the minutes noted, "One participant suggested that, in part because of the evidence that the equilibrium real interest rate was low by historical standards, the Committee should discuss the possibility of increasing its longer-run inflation objective."
After testing "normalization tools," staff members expect "normalization would likely proceed smoothly once it commences." Staff will offer more frequent updates on financial market developments after liftoff to allow timely changes "to maintain appropriate control over money market rates," if appropriate.
The staff review of economic data showed a slight increase in real gross domestic product for the first quarter, most likely as a result of transitory factors, "with little implication for the pace of expansion beyond the near term." Labor markets cooled a bit, and inflation was too low, "partly restrained by earlier declines in energy prices along with further decreases in non-energy import prices. Market-based measures of inflation compensation were still low, while survey measures of longer-run inflation expectations remained stable."
Medium-term GDP projections were raised slightly, with expansion expected to be faster "than potential output in 2015 and 2016, supported by increases in consumer and business confidence and a small pickup in foreign economic growth, even as the normalization of monetary policy was assumed to begin. In 2017, real GDP growth was projected to slow toward, but to remain above, the rate of growth of potential output."
Inflation estimates for the near-term were also push up "a little, reflecting the slightly higher-than-expected recent monthly data on core consumer prices and a path for crude oil prices that was a bit higher than in the previous projection. The medium-term forecast for inflation was little changed, with inflation in 2016 and 2017 projected to move closer to, but remain below, the Committee's longer-run objective of 2 percent, as energy prices were expected to rise, import prices to turn up, and resource utilization to tighten further. Thereafter, inflation was anticipated to move back to 2 percent, with inflation expectations in the longer run assumed to be consistent with the Committee's objective and slack in labor and product markets projected to have waned."
Private spending in the first quarter was termed "disappointing," and the housing market stayed "slow." Participants generally felt this weakness was "partly or even largely transitory" as a result of weather and the labor problems on the West Coast, which "temporarily disrupted some supply chains."
Other panelists offered reasons why the weakness could continue. "However, most participants continued to see the risks to the outlook for economic growth and the labor market as nearly balanced."
