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.