Federal Reserve System: FOMC Says Rate Hike 'Approaching,' But Inflation Conditions Not Yet Met

The U.S. Federal Reserve may wait until after September to lift interest rates after the latest minutes from the central bank’s July meeting indicated conditions for the first rates increase in about a decade had not been met, due primarily to muted inflation that has not yet moved toward the Fed’s target.

The Fed minutes were released on Bloomberg terminals about a half-hour early, after a news organization broke the embargo, set for 2 p.m. EDT. The central bank then released the minutes on its website around 1:45 pm EDT.

The latest minutes show policymakers discussing whether tightening monetary policy too soon could damage the U.S. economy and dampen the prospects for maximum employment and the targeted 2 percent inflation. "Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point. Participants observed that the labor market had improved notably since early this year, but many saw scope for some further improvement," the Federal Reserve’s July 28 and July 29 minutes said.

Consumer price inflation continued to run below the Fed’s 2 percent target, restrained by declines in energy prices and further decreases in nonenergy import prices, the Fed said.

“There’s very little nuance changed from the statement,” said Doug Cote, chief market strategist at Voya Investment Management, adding that the Fed is waiting on more economic data to make a decision. “But with today’s consumer price index lower than expectations, they certainly can’t be pleased.”

The minutes are from a meeting that took place before Wednesday's most recent data on consumer price inflation. The Consumer Price Index edged up 0.1 percent in July after advancing 0.3 percent in June, marking the sixth straight month of increases, the Labor Department said Wednesday, marking the sixth straight month of gains. However, the CPI has climbed just 0.2 percent in the last 12 months.

U.S. inflation has run below the Federal Reserve’s 2 percent objective for 38 straight months.

The U.S. personal consumption expenditures (PCE) price index, excluding the volatile food and energy sectors, which is a measure of “core” inflation the Fed uses to track underlying consumer price trends, ran at 1.3 percent in the first half of the year from a year earlier, the Commerce Department said on Aug. 4.

There is now a 50 percent chance the Fed will announce lifting rates at its meeting on Sept. 16 and Sept. 17, with a 60 percent chance of a liftoff at the central bank’s December meeting, Cote said.

Even before Greeks voted to reject bailout proposals from the country’s international creditors and China’s stock market began to tumble last month, the U.S. Federal Reserve was questioning its stance on an interest rate increase planned for sometime later in 2015. At the Federal Open Market Committee's meeting on June 16 and June 17, officials wondered whether a hike would be “premature” in the face of uncertainty in Greece and China, according to minutes from the meeting released in July.

However, in the Fed’s most recent July meeting minutes, the central bank said the reaction in financial markets outside Greece and China was limited.

“The effect of financial stresses related to Greece and China on the largest U.S. financial firms was limited to date, perhaps reflecting the relatively strong financial positions and low direct exposures among such firms and a view among market participants that foreign authorities would take actions to stem spillovers,” the minutes said.