Rate Increase in June?

Federal Reserve officials want to raise interest rates in June. Now it is up to the U.S. economy to confirm their view that slow growth in the first quarter was temporary.

Minutes of the April 26-27 Federal Open Market Committee (FOMC) meeting released Wednesday in Washington used the word “June” six times in a policy context. That signal follows several speeches by regional Fed bank presidents warning investors not to dismiss a mid-year hike after the odds of such a move edged close to zero.

“The Fed put the June hike relatively aggressively on the table so long as the economic data continues to show positive signs,” said Tony Bedikian, managing director of global markets for Citizen's Bank in Boston.

Chair Janet Yellen will have an opportunity to harden the impression that a June move is on the cards when she speaks at Harvard University on May 27. The World Affairs Council of Philadelphia has also announced she will address their members on June 6. That's on the eve of the blackout period before the next FOMC meeting on June 14-15, and three days after the release of the May U.S. employment report.

Consumer Rebound

The U.S. economy barely grew in the first quarter, expanding at a 0.5 percent annual rate. Fed officials are cautious about the data, but also appear to be betting that the consumer will make a comeback. Retail sales in April rose by the most in a year, an early sign that they could be right.

The minutes showed that most officials judged it “likely would be appropriate” to raise rates in June, provided incoming data were in line with a second-quarter pickup, the labor market continued to strengthen, and inflation progressed toward the Fed's 2 percent goal.

Financial markets got the message. The probability of a June hike rose to 32 percent after the release of the minutes from 12 percent a day earlier and 4 percent on Monday, according to pricing in federal funds futures contracts.

The sense of urgency the committee signaled followed their decision to keep policy on hold for the past three meetings after raising rates in December for the first time in nearly a decade. Meanwhile, inflation is gradually moving higher and labor markets continue to post solid-to-strong gains in payrolls that have lowered the U.S. jobless rate to 5 percent, which is close to Fed estimates of full employment.

Moving Closer

Harm Bandholz, chief U.S. economist at UniCredit Bank AG in New York, said it is difficult to know when there will be enough good news to persuade cautious Fed officials, though he said that point was moving closer.

“The Fed is basically meeting both of its mandates: We are around 2 percent inflation and around full employment,” said Bandholz. “They know they have to do something.”

The section of the minutes that referred specifically to the voting members of the committee noted that their views rested on three points: further progress on inflation and in labor markets, and their sense of the risks around that outlook.

This last component, which incorporates a host of hazards that could push the economy off track, is difficult for both economists and Fed officials to define. But the risks are visible.

Britain votes June 23 on whether to stay in the European Union or leave. Bank of England Governor Mark Carney warned last week that leaving could trigger a British recession and some Fed officials noted that a U.K. exit could have repercussions for financial markets.

“There was strong sense of purpose in the committee that they wanted to get on with the process of normalization,” said Kevin Logan, chief U.S. economist at HSBC Securities USA Inc. in New York. “A move in June is on the table, but its still data dependent.”

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