Fed Minutes: Data Unlikely to Support June Rate Hike

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Fed Minutes
Jacquelyn Martin/APFederal Reserve Chair Janet Yellen
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.

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."

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Fed Minutes: Data Unlikely to Support June Rate Hike
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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