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Fed Officials Saw Outlook as Cloudy at Meeting Before ‘Brexit’ Vote Fed Officials Saw Outlook as Cloudy at Meeting Before ‘Brexit’ Vote
(about 4 hours later)
WASHINGTON — The Federal Reserve may have confused investors in recent months with conflicting signals about how soon it planned to raise its benchmark interest rate, and an official account of the Fed’s most recent meeting in June explains why: Fed officials also were confused. WASHINGTON — The Federal Reserve did not raise its benchmark interest rate in June because officials worried that economic growth might be flagging, according to an official account published on Wednesday.
And that was before Britain voted to leave the European Union. And that was before Britain upset financial markets by voting to leave the European Union.
Fed officials voted unanimously to do nothing at the June meeting because of the cloudy economic outlook. It was the Fed’s first unanimous vote of the year, but it was the result of confusion rather than consensus. And officials disagreed about how much longer to wait before raising interest rates, according to the account, released Wednesday after a standard three-week delay. The June meeting, and the fallout from the so-called Brexit vote, continued what has become a familiar pattern: The Fed entered the year predicting stronger growth and a gradual return to higher interest rates. It has beat a slow retreat from both predictions as the data has disappointed its expectations.
“Almost all participants judged that the surprisingly weak May employment report increased their uncertainty about the outlook for the labor market,” the minutes said. They added that opinion was divided, with some officials pointing to other data suggesting the labor market remained in good health, while others fretted the weak report might be an early sign of fresh problems. “This is not an economy that is running hot,” Daniel Tarullo, a Fed governor who advocated patience, said on Wednesday. He added that it would take time to assess the impact of Britain’s exit from the European Union on the American economy.
The advent of Brexit — Britain’s vote to leave the European Union — has increased the Fed’s uncertainty. There is general agreement that the decision is bad for the global economy, but the magnitude remains to be seen. In the short term, that is another reason for the Fed to delay any rate increases. Measures of market expectations now imply that investors do not expect a rate increase until next year. Financial markets are now betting heavily that the Fed will not raise rates again before 2017. The yield on the benchmark 10-year Treasury bond has fallen below 1.4 percent, the lowest level in history.
“We are still evaluating it,” Stanley Fischer, the Fed’s vice chairman, said Friday on the business cable news channel CNBC. “My guess is that it will be less important for the U.S. than the countries directly involved — almost just logically so. We will wait and see.” Fed officials insisted in the weeks before the June meeting that they were thinking seriously about raising rates for the first time since December. The meeting account, released after a standard three-week delay, said the weak pace of reported job growth in May effectively ended that debate.
One early consequence: The yield on the benchmark 10-year Treasury bond has fallen to the lowest level in history, closing at 1.37 percent Tuesday before rebounding slightly on Wednesday morning. Borrowing costs for other major countries, including Japan and Germany, have fallen below zero, which is putting downward pressure on Treasuries as investors seek a little more yield. “Almost all participants judged that the surprisingly weak May employment report increased their uncertainty about the outlook for the labor market,” the account said.
Before Brexit, the account says that officials saw improvement in the global economic outlook and that they remained fairly confident in the continued strength of the domestic economy. The vote to do nothing at the June meeting was unanimous — a first for the Fed since January — but differences persisted over how long the Fed should wait. Some officials continued to argue for raising rates soon, while others saw little reason for urgency.
Those officials, however, continued to disagree about when to resume raising rates. The Fed raised rates in December for the first time since the crisis, but it has not moved since. Those in favor of moving argued that unemployment and inflation were close to levels the Fed regarded as healthy, and waiting could cause the economy to overheat. In their view, the minutes said, “taking another step in removing monetary accommodation should not be delayed too long.”
Some officials argued that unemployment and inflation were close to levels the Fed regarded as healthy, and waiting to raise rates could cause the economy to overheat. In their view, the minutes said, “taking another step in removing monetary accommodation should not be delayed too long.” Stanley Fischer, the Fed’s vice chairman, said last week on the business cable news network CNBC that there was still reason for optimism about the economic outlook. “First of all, the U.S. economy since the very bad data we got in May on employment has done pretty well,” he said. “Most of the incoming data looked good.”
Others suggested they were inclined to leave rates near zero for some time. These officials, the account said, “underscored they would need to accumulate sufficient evidence to increase their confidence that economic growth was strong enough to withstand a possible downward shock to demand.” Others, however, were inclined to leave rates near zero for some time. These officials, the account said, “underscored they would need to accumulate sufficient evidence to increase their confidence that economic growth was strong enough to withstand a possible downward shock to demand.”
Daniel Tarullo, a Fed governor who has advocated caution, told The Wall Street Journal Wednesday that he was not convinced a recent uptick in inflation would endure. He added that he saw little reason for urgency in raising interest rates. James Bullard, the president of the Federal Reserve Bank of St. Louis, announced after the June meeting that he now expected the Fed should keep rates near the current low level through 2018.
“This is not an economy that is running hot,” Mr. Tarullo said. Rob Martin, an economist at Barclays, said the debate would be decided by job growth in the coming months. The government will release its June employment report on Friday.
“If employment growth picks up this summer, members will become more optimistic over the outlook for activity,” Mr. Martin wrote on Wednesday, after the release of the meeting minutes. “Likewise, if employment growth disappoints over the summer, even the most hawkish member will begin to revise its outlook lower and no member would push hard for a September rate hike.”
Since the financial crisis, inflation has consistently failed to reach the 2 percent annual pace the Fed regards as healthy. Inflation expectations have declined sharply. And, as inflation sags in other developed nations, some economists warn that central banks are not doing enough. But the Fed remains officially sanguine. The account said most officials expected faster inflation in coming years.
The global economy also remains a concern. The June minutes said that officials saw signs of improvement — but that was before the British vote. There is general agreement that Britain’s exit from the European Union will drag on growth, but the magnitude remains unclear.
In the short term, that is another reason for the Fed to delay any rate increases.
“We are still evaluating it,” Mr. Fischer said on Friday. “My guess is that it will be less important for the U.S. than the countries directly involved — almost just logically so. We will wait and see.”