Federal Reserve officials left interest rates on hold last month as heightened uncertainties about the U.S. labor market and financial stability threatened their outlook, according to minutes of their meeting the week before the U.K. voted to leave the European Union.
The minutes of their June 14-15 meeting show that the Federal Open Market Committee saw it prudent to wait for the result of Britain’s June 23 referendum, which at the time was still too close to call. The decision in favor of Brexit has since sent the pound tumbling and has driven bond yields to record lows.
The committee also weighed the health of the U.S. economy and the long-run trajectory for rate increases. A slowdown in hiring was among their chief concerns and another reason for caution. While “participants generally agreed that it was advisable to avoid overreacting to one or two labor-market reports,” the implications of recent employment data were viewed as “uncertain,” the minutes show. Most officials judged that they needed more information on jobs, production and spending.
“Most participants judged that, in the absence of significant economic or financial shocks, raising the target range for the federal funds rate would be appropriate if incoming information confirmed that economic growth had picked up,” job gains were sufficient to achieve full employment and inflation was moving up toward their 2% goal in the medium term, the minutes showed.
Many Fed officials thought job gains in May probably understated the true underlying pace because of transitory factors including a telecommunications strike and statistical noise. At the same time, some noted that the lower rate of payroll gains could “be indicative of a broader slowdown in growth of economic activity.”
That pessimistic sentiment was echoed elsewhere in the minutes: in discussing business investment, some participants thought that sluggishness “could portend a broader economic slowdown.”
In their discussion, the FOMC minutes noted that the fed funds rate consistent with maintaining trend economic growth, also known as the neutral rate, “appeared to be lower currently or was likely to be lower in the longer run than they had estimated earlier.” Several said that given the uncertainty around the neutral rate, the committee could better gauge the effects of rate hikes if they were made gradually.
Fresh turmoil in financial markets and renewed questions about global growth have investors pricing in no chance of an interest-rate increase at the Fed’s July 26-27 meeting and only 8% odds of a move by year end, futures prices suggested on Tuesday.
“These uncertain times are clearly weighing on the Fed’s outlook and potential monetary policy actions,” Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina, said ahead of the minutes’ release. “They are having to grapple with what all of these recent changes mean for their expectations going forward.”
At the Fed’s June meeting, monetary policy makers continued to project two rate increases in 2016, but cut their projections to three increases in each of the next two years, down from four. Policy makers’ median estimate for the longer run rate also fell, to 3% from 3.25% in their March estimates.
The Fed saw inflation rising to 1.4% in 2016, 1.9% in 2017 and 2% in 2018 in June. Unemployment is expected to be 4.7% in the fourth quarter, a level it hit in May, based on the median projection.
“The question is — has what’s transpired since we met in June, has that really changed the outlook for employment and inflation, and the risks to that outlook?” San Francisco Fed President John Williams said in an interview on Tuesday. “My own view is that GDP growth over the four quarters of 2016, this year, my view has not changed much — maybe down a tenth of a percentage point, so just a little bit under 2% growth for this year. I still see the unemployment continuing to edge down to maybe 4.5% by end of year.”
The Fed’s late-July meeting isn’t followed by a press conference with Chair Janet Yellen, nor will fresh economic projections be released.
Between now and then, the Fed will receive several fresh readings on economic data that could help them to make sense of a slump in payroll gains. New jobs data for June are set for release on Friday, and economists in a Bloomberg survey expect an increase of 179,000 to follow a 38,000 gain in May.
Job gains have averaged 150,000 so far this year.
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