Minutes Of The Federal Reserve Open Market Committee

The Federal Reserve could still hike interest rates in June despite weak recent U.S. data and investor skepticism, two influential officials with the central bank said on Wednesday, putting the spotlight squarely on the economy’s performance in the next two months.

Disappointing U.S. jobs growth, manufacturing activity, and retail sales over the winter had pushed market expectations for a rate hike to later in the year. June has long been seen as the earliest the Fed could tighten policy, after more than six years of near-zero rates.

But New York Fed President William Dudley and Fed Governor Jerome Powell on Wednesday sketched out scenarios in which the central bank could make an initial move earlier than many now expect and then proceed in a slow and gradual manner on further rate increases.

“I could imagine circumstances where a June rate hike could still be in play,” Dudley, a permanent voting member on the Fed’s policy committee and a close ally of Fed Chair Janet Yellen, told a Reuters Newsmaker event in New York.

“If the economy’s strong, the unemployment rate is dropping, wages are rising, and the outlook is good, you could conceivably get to that point,” he said, adding “the bar is probably a little bit higher” for a June hike given recent data.

Minutes of the Fed’s March 17-18 policy meeting, released on Wednesday, also show central bank officials are eager to get the rate hike process started but are likely to go slow once “lift-off” begins.

Several participants at the meeting said they were virtually certain June would be the right time for what would be the first rate hike since 2006, according to the minutes.

While a “couple” of participants said they did not think such a move would be appropriate until next year, the rest of the policymakers would be watching for evidence that the impact of low oil prices and a strong dollar had eased, and that the U.S. economy was continuing to generate jobs.

Upcoming reports on employment, economic growth, prices, industrial activity and other indicators will, as a result, will take on greater importance.

U.S. stocks turned negative and prices for U.S. government debt fell after the release of the minutes, while the dollar gained against a basket of currencies.

MECHANICS OF RATE HIKE

Powell, speaking in New York, said he would be willing to start tightening even at current low inflation levels, but added that the Fed should then proceed slowly to ensure the economy continued to recover from the 2007-2009 recession and financial crisis.

“You cannot wait until you see the goal posts coming because monetary policy works with these long lags,” Powell told the Council on Foreign Relations, adding that the Fed could hike rates in June if economic data over the next two months indicated the recovery is on track.

“By the time of the June meeting we will have had … a lot more incoming data on just about everything in the economy. June is a different world than today,” Powell said. “I don’t think we need to be in a hurry,” he said, but “you have to start well before you actually hit the goal.”

Even a modest rate hike in the world’s largest economy would ripple through financial markets.

At its policy meeting last month the Fed also refined plans for the mechanics of the initial rate increase, which will need to be engineered around any market turbulence that might arise.

Futures traders, who on Tuesday predicted December was the most likely month for the tightening to begin, on Wednesday shifted that likelihood to October, according to futures markets. Wall Street economists generally expect the Fed to move in September.

“It’s still going to be data-dependent,” said Gary Thayer, global head of macro strategy at Wells Fargo Investment Institute in St. Louis. “If you are looking at the factors they are focused on – the improving labor markets, the stabilization of energy prices and the leveling off of the dollar – those would suggest we could still see a rate hike in summer.”

While the lift-off will breach a post-crisis psychological barrier, policymakers have repeatedly noted that rates will remain near historic lows, potentially for years.

Dudley, among the most dovish of policymakers, said there were still good reasons for the Fed to err on the side of hiking rates too late, in order to make sure as many workers as possible are pulled into the labor force. Powell also said the Fed should “look for a little more proof than usual” that labor markets are tight.