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Many Fed Officials Said June Liftoff Unlikely, Minutes Show

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Federal Reserve officials last month didn’t expect to raise rates at their next meeting in June even as they concluded that a first-quarter economic slowdown was unlikely to persist, minutes of the meeting show.

Many of the participants “thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied,” according to minutes of the April 28-29 Federal Open Market Committee session released Wednesday in Washington.

That sentiment outweighed the opinion of “a few” members, who said they anticipated the economy would be ready for a June liftoff, the minutes showed. At the same time, officials didn’t rule out the option of tightening at that time.

The minutes also confirmed the FOMC’s statement in April that it expects the economy to return to a “moderate pace” of growth after a first-quarter slowdown. Since the meeting, payrolls figures have improved, while weaker-than-forecast data on manufacturing and retail sales prompted economists to mark down projections for second-quarter economic growth.

U.S. stocks were little changed, while the dollar held gains and Treasuries extended a rally after the release of the minutes. The Standard & Poor’s 500 Index was up 0.1% to 2,130.46 at 2:19 p.m. in New York. The yield on 10-year Treasury notes fell five basis points, or 0.05 percentage point, to 2.25%.

Rate Timing

Officials are weighing the timing of the first interest rate increase since 2006. Most expect to tighten later this year and have said they could move at any meeting from June onward, depending on the outlook for jobs and higher inflation.

Gross domestic product rose just 0.2% at an annual pace in the three months through March, versus 2.2% in the fourth quarter of 2014. The FOMC in April said “economic growth slowed during the winter months, in part reflecting transitory factors.”

The minutes revealed details of the committee’s discussion about how much of the slowdown resulted from causes that are likely to fade. Those included severe winter weather, a labor dispute at West Coast ports, and a “pattern” of weak first-quarter economic data over a number of years.

Gasoline Windfall

Still, officials were surprised Americans weren’t spending the windfall from lower gasoline prices, “highlighting the possibility of less underlying momentum in consumer expenditures than participants had previously judged.”

Some participants “expressed particular concern about this prospect” because their forecast for a moderate expansion depended on a scenario where household spending grows “robustly despite softness in other components of aggregate demand.”

A strong dollar, which makes U.S. goods more expensive in overseas markets, was one reason a number of officials thought recent weakness in economic growth could persist.

Even though the dollar’s gains have slowed, its impact on exports could be “larger and longer-lasting than previously anticipated,” the minutes state.

Policy makers also worried that market reactions to a rate increase could pose risks to financial stability.

Some said yields “could rise sharply” as they did in mid-2013, and potentially drive longer-term interest rates higher, according to the minutes.

New Risks

That may give rise to new risks that have come into play as markets have evolved with the rise of new technology that could spur volatility, according to at least one policy maker.

“It was suggested that the tendency for bond prices to exhibit volatility may be greater than it had been in the past, in view of the increased role of high-frequency traders, decreased inventories of bonds held by broker-dealers, and elevated assets of bond funds,” the minutes said.

Some participants said those risks underscore that the FOMC must be careful in communicating policy plans to “help damp any resulting increase in market volatility around the time of the commencement of normalization.”

–With assistance from Jeanna Smialek in Washington.

— Check out Fed Might Take Backdoor Approach to Interest Rate Hike: Bill Greiner on ThinkAdvisor.