Federal Reserve officials saw a strengthening case to raise interest rates as the labor market tightened, with some saying a hike should happen in December, according to minutes of their November gathering released Wednesday in Washington.
“Some participants noted that recent committee communications were consistent with an increase in the target range for the federal funds rate in the near term or argued that to preserve credibility, such an increase should occur at the next meeting,” the record of the Federal Open Market Committee meeting showed. Many officials said a rate rise could be appropriate “relatively soon,” data permitting, it said.
Fed officials will hold their final meeting of the year on Dec. 13-14. Uncertainties surrounding what economic policies President-elect Donald Trump will pursue haven’t shaken expectations that officials will raise rates next month for the first time in a year. Investors see a 100% probability of a move, according to pricing in federal funds futures contracts.
The minutes showed diverse views on the amount of labor-market slack and the risks surrounding their 2% inflation goal.
The November minutes also showed officials emphasized that near-term changes in the benchmark borrowing cost would be dependent on economic data, with the expectation that “only gradual increases” would be warranted. FOMC members noted that labor market conditions had improved “appreciably.”
“It was noted that allowing the unemployment rate to modestly undershoot its longer-run normal level could foster the return of inflation to the FOMC’s 2% objective over the medium term,” the minutes said.
Since officials last met Nov. 1-2, the week before the U.S. presidential election, they’ve seen strength in domestic consumption with retail sales in September and October showing the biggest back-to-back gains since 2014, and new records in stock indexes, boosting household wealth. U.S. central bankers have held the federal funds rate target range at 0.25% to 0.5% since December. Two officials dissented earlier this month in favor of higher rates.
The unemployment rate last month stood at 4.9%, only slightly above Fed officials’ median estimate of full employment. Core inflation measures are just below the Fed’s 2% target. The personal consumption expenditures price index, minus food and energy, rose 1.7% in the 12 months through September.
At the same time, rates on a 30-year mortgage have jumped to 3.94% versus 3.54% at the start of the month, and the dollar is 4% stronger against major currencies, according to the Bloomberg Dollar Spot Index, possibly making U.S. exports less competitive.
Fed Chair Janet Yellen told the Joint Economic Committee of Congress on Nov. 17 that the economy “is making very good progress” toward the central bank’s goals, and “the judgment the committee reached in November still pertains.”
At the November meeting, Fed officials discussed the longer-term operating framework for monetary policy, concluding that the matter warranted further discussion, the minutes showed.
“A number of policy makers stated that they continue to view expansion of the balance sheet through large-scale asset purchases as an important tool to provide macroeconomic stimulus” when interest rates are stuck at zero, the minutes showed. “Most participants did not indicate support for using the balance sheet as an active tool in other situations or for other purposes.”
The minutes noted that Yellen said the Fed would “proceed cautiously” and communicate in advance any changes to its operations.
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