5/25/2017 Fed Minutes Signal Officials Ready to Raise Rates Again Soon ­ WSJ

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Federal Reserve officials expected at their policy meeting this month that it would “soonbe appropriate” to raise short-term interest rates, a signal the U.S. central bank couldmove in June at its next gathering.

The Fed also moved toward a consensus on a proposal to start gradually shrinking its$4.5 trillion in holdings of Treasury and mortgage securities later in the year, accordingto minutes of the gathering released Wednesday. Under the approach discussed, theywould allow increasing amounts of those securities to mature over time, withoutreinvesting the proceeds.

Fed officials left their benchmark short-term interest rates unchanged within a rangebetween 0.75% and 1% at the meeting May 2-3. Several Fed officials in recent weeks havesaid they believe the economy will still be strong enough to warrant two more quarter-percentage-point rate increases this year.

Officials were inclined to stick to that scenario even though the economy appeared tostumble in the first quarter, the minutes showed. Officials saw that slowdown as likely tobe transitory. And while some expressed concern about recent softness in inflation, itwasn’t enough to knock them off track.

Their next meeting is June 13-14, which will be followed by a press conference with FedChairwoman Janet Yellen.

“Most participants judged that ifeconomic information came in about inline with their expectations, it would

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Fed Minutes Signal Officials Ready toRaise Rates Again SoonMay minutes also show officials moving toward consensus on a plan to shrink the Fed’s $4.5trillion balance sheet

The Federal Reserve building in Washington. PHOTO: ANDREW HARNIK/ASSOCIATED PRESS

Updated May 24, 2017 5:50 p.m. ETBy Nick Timiraos

FOMC MINUTES

May 2­3 Meeting of the Federal Open Market Committee

5/25/2017 Fed Minutes Signal Officials Ready to Raise Rates Again Soon ­ WSJ

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soon be appropriate for the committee to take another step” in raising rates, theminutes said.

Before the minutes were released, “we thought there was a pretty good chance” of a rateincrease in June, said Michael Feroli, chief U.S. economist at J.P. Morgan Chase & Co.“Saying ‘soon’ says that that is the committee’s intention, as well. They said ‘soon’ in theJanuary minutes, and they went in March.”

Markets edged higher afterthe release of the minutes,which did little to changeinvestors’ view of theimmediate rate outlook.The Dow Jones IndustrialAverage rose 74.51 points,or 0.36%, to 21012.42. Theyield on the benchmark 10-

year U.S. Treasury note fell to 2.266%, down from 2.285% Tuesday. Yields fall as pricesrise.

Late Wednesday, after the minutes were released, traders in futures markets placedabout a 79% probability on a Fed rate increase by June, according to CME Group.

Officials expected job gains, rising household income and wealth, and buoyantconsumer sentiment to bolster spending in the months ahead, and they took greatercomfort in improvements in the housing market and business investment.

“Participants generally indicated their assessments of the medium term economicoutlook had changed little since the March meeting,” the minutes said.

With their forecasts relatively stable, officials effectively believed they had a green lightto move again.

Inflation has wobbled in recent months, a cause of concern for some officials, but athreat most were prepared to look past for now. The Fed’s preferred inflation gauge, theprice index for personal-consumption expenditures, briefly exceeded the Fed’s annual2% target in February but posted a greater-than-expected drop in March, with annualprices up 1.8%. A separate inflation gauge released since the Fed meeting, the LaborDepartment’s consumer-price index, also ebbed in April. Prices excluding food andenergy were up 1.9% on the year, the first time the annual gain in core prices had beenbelow 2% since October 2015.

Officials generally believed the deceleration in price pressures would prove temporary,though some expressed uncertainty about the greater-than-expected weakness.

The Fed will see two more inflation reports before the June meeting: the April readingof its preferred gauge on Tuesday and the May reading of the consumer-price index onJune 14. It will also see the May employment report on June 3.

The uncertainty around the inflation outlook stands in contrast to labor markets. TheApril employment report, released days after the recent Fed meeting, showed steadyhiring, with an average 185,000 jobs added monthly so far this year. The unemploymentrate fell to 4.4%, at the bottom range of officials’ expectations. The rate hasn’t beenlower since May 2001.

Some officials at the meeting said stronger hiring and wage gains and larger declines inthe unemployment rate could warrant a faster pace of rate increases, but a few said theFed could move more slowly than currently projected if continued declines in theunemployment rate didn’t create obvious price pressures.

The central bank’s discussion about how to wind down its portfolio, also known as itsbalance sheet, has picked up because the economy is moving closer to meeting the Fed’sgoals of steady, low inflation and maximum, sustainable employment.

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Officials stopped adding to the balance sheet more than three years ago, but they havebeen reinvesting the proceeds of maturing assets to keep their holdings steady. Thosereinvestments have helped to hold down long-term interest rates, and allowing them toroll off without reinvestment could push up long-term rates.

A Fed staff briefing on their latest proposals to shrink those holdings suggested taperingreinvestments of Treasury and mortgage securities by allowing a preset dollar amountof holdings to run off every month—that is, by not reinvesting their proceeds. Theamount of securities allowed to run off would initially be relatively small, and the Fedcould then increase those amounts every quarter.

“Nearly all” officials agreed with this approach, which they believed would accomplishtheir goal of reducing the holdings in a gradual and predictable way, the minutes said.

Officials want to avoid a rerun of the 2013 “taper tantrum,” when investor concerns overthe Fed’s decision to slow the pace of asset purchases roiled markets, leading to a largespike in Treasury yields and capital outflows from emerging-market economies.

Under the emerging scenario Fed officials have outlined in public speeches andinterviews, the central bank would raise short-term interest rates two more times thisyear and then pause rate increases later in the year when they announce plans to settheir balance-sheet wind-down into motion. A pause would allow the Fed to watch forany ill effects before resuming rate increases in 2018.

Officials have said they want the process to run quietly in the background once it starts,requiring adjustments only if the economy deteriorates significantly. The balance-sheetwind-down should be predictable and boring with lots of advance notice to markets,“the policy equivalent of watching paint dry,” said Philadelphia Fed President PatrickHarker on Tuesday.

Write to Nick Timiraos at nick.timiraos@wsj.com

Appeared in the May 25, 2017, print edition as 'Fed Signals Readiness For a Rate Increase.'

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