Fed Minutes: Data Unlikely to Support June Rate Hike

By Michael Flaherty and Howard Schneider

WASHINGTON -- U.S. Federal Reserve officials believed it would be premature to raise interest rates in June and that a bump in inflation was being offset by a weaker labor market and softer data, according to minutes from the central bank's April policy meeting.

"Many participants, however, thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising [interest rates] had been satisfied ... " said the minutes, which were released Wednesday.

U.S. Treasury prices were largely unchanged after the release of the minutes, while short-term interest rate futures and TIPS inflation break-even rates held firm, as did stocks.

The minutes from the April 28-29 meeting of the Fed's policy-setting committee also showed most participants expected the U.S. economy to pick up pace after a slowdown in the first quarter and that labor market conditions would improve.

But Fed officials flagged a number of concerns weighing on the central bank, including disappointment that falling oil prices didn't spur consumer spending as much as had been hoped. They also cited economic worries in China and Greece.

The minutes largely reflected the Fed's April policy statement, which pointed to economic softness but described the slow growth as reflecting, in part, transitory factors such as bad weather and a U.S. port disruption.

Focus on Yellen

Investors now will focus on a speech Friday by Fed Chair Janet Yellen for signs of whether she believes the economy is back on track after the first-quarter slump, or if she nods to the latest batch of weak U.S. economic data.

Officials at the April meeting also mentioned concerns about bond market volatility and the possibility of long-term rates spiking when the central bank begins to raise rates -- a worry Yellen spoke of publicly earlier this month.

%VIRTUAL-WSSCourseInline-876%The Fed also debated whether being more explicit in its post-meeting communication would avoid a worrying spike in long-term rates, though most participants said keeping to the meeting-by-meeting policy was best for now.

"Energy prices were no longer declining and most participants continued to expect that inflation would move up toward the committee's 2 percent objective over the medium term," the minutes said.

Out of 62 economists polled by Reuters, 50 expect the Fed to hike rates in the third quarter. Most policymakers have stuck to the mantra that the central bank will watch the data and assess on a "meeting-by-meeting" basis whether to raise rates, and have telegraphed September as a likely date for the first increase.

A recent pull-back in the strength of the dollar and higher oil prices both received attention in the minutes. A lower greenback and higher energy costs are key factors in moving inflation higher and prompting the Fed to bump up rates in tandem with rising prices across the economy.

The Fed has repeatedly said it will not raise rates until it is "reasonably confident" that prices are moving toward the central bank's 2 percent target.

Some of that confidence appeared in the minutes, as it was noted that market-based inflation measures, while still low, had risen slightly.

"Some participants pointed out that, by some measures, the most recent monthly inflation readings had firmed a bit."