Catching many investors off guard, the US Federal Reserve (Fed) made clear on Wednesday that an interest rate hike next month is likely if the economy keeps improving.
The minutes of their most recent meeting late last month showed that Fed officials widely felt it would be time to raise rates at their June 14 to June 15 meeting as long as hiring and economic growth strengthened and inflation showed signs of accelerating toward the Fed’s 2 percent target rate.
The Fed had voted 9-1 last month to keep rates unchanged while noting that threats from the global slowdown had eased.
Asia stocks were mostly down on Wednesday, with energy and commodity firms taking a beating as investors digested news that an imminent Fed interest rate hike could be on the cards. Hong Kong fell 0.5 percent in afternoon trade, while Sydney closed 0.6 percent lower and Seoul dropped 0.5 percent. Shanghai and Tokyo stocks closed flat.
Bryn Mawr Trust chief investment officer Ernie Cecilia said that many investors did not think the Fed was inclined to raise rates next month and were surprised by Wednesday’s release.
The minutes said some Fed officials did express concerns at last month’s meeting that the economic data might not be clear enough by the middle of next month to determine whether a rate hike was warranted.
However, that view was balanced against the belief of other officials that the data would be strong enough to justify a hike next month.
Even at last month’s meeting, Fed officials were encouraged by developments in the economy and financial markets, the minutes showed. Several participants suggested that the risks to the economic outlook were now “roughly balanced.”
Analysts said that the Fed might want to pull the trigger next month given evidence that the economy is recovering after nearly stalling in the first three months of the year.
In addition, inflation, which has been running below the Fed’s target level for four years, has shown signs of picking up as energy prices rebound from a steep drop at the start of the year.
The US government said this week that the consumer price index jumped 0.4 percent last month, reflecting higher energy costs.
By the time of next month’s meeting, the Fed would have seen several key reports, including this month’s job growth, consumer spending for last month and a revised estimate of economic growth in the first quarter.
In remarks this week, three Fed officials raised the prospects of a rate hike next month.
San Francisco Fed president John Williams called next month a “live” meeting.
Atlanta Fed president Dennis Lockhart said of the possibility of a hike next month: “I wouldn’t take it off the table.”
Dallas Fed president Robert Kaplan on Tuesday said that “in the not-too-distant future” the Fed should be raising rates.
Speaking in Midland, Texas, Kaplan said he might advocate for a move next month or in July.
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