US Federal Reserve Chair Janet Yellen’s premium on consensus may lead to a Fed decision she has not yet endorsed, as a near-majority aligns in favor of a possible June interest rate hike.
Seven of the Fed’s 17 members have now said that they at least want the option of a June tightening on the table, or have pushed in general for an earlier increase amid an expectation that wages and inflation would turn higher.
By contrast, there is a dwindling core of officials who say publicly that the US economy and labor markets in particular still have a long way to go — just four Fed members have in recent weeks clearly said that rate hikes would not be appropriate until much later in the year or even into next year.
The five members of the Fed’s Washington-based board of governors, including Yellen, have spoken less definitively, although governors including Jerome Powell have said that they expected strong job growth to continue. Not all of the seven who point to June vote this year on the Fed’s 10-member policy setting committee, but all participate in policy discussions.
The Fed is likely — at a policy meeting set for March 17 and March 18 — to remove language saying the central bank will take a “patient” approach to raising rates, taking away the final verbal constraint to a June rate hike, current and former Fed officials said.
“It is likely [that] they remove ‘patient’ in March,” said David Stockton, a former Fed research director now at the Peterson Institute for International Economics. “Even if Yellen might not, left to her own devices, be ready to move on rates, there is probably a growing sentiment that the time is getting closer.”
The use of the word “patient” signals that the Fed would wait at least two more meetings before considering a rate hike. There is to be one more Fed meeting, next month, before June. If the Fed later this month says it remains patient, then a June increase is off the table, likely pushing the decision to September, when the Fed is scheduled to hold a news conference after its meeting.
Stockton said that he expects a September liftoff, but he regards it as “a close call” that could shift to June if either wages or inflation begin to firm or if the Fed feels it needs to show markets it can tighten policy.
There is little difference between a June or September start to a tightening cycle that is likely to evolve slowly over the next two years, and “maybe you just get it out of the way,” said Jon Faust, a Johns Hopkins University economics professor and former special adviser to the Fed board.
The Fed has not raised interest rates since 2006, and Yellen’s career-long focus on labor markets has led some including Stockton to say that she would resist an early rate increase, risking higher inflation in favor of trying to generate more jobs. Investors have generally expected the Fed to be later in its first rate hike and to move more slowly than policymakers have indicated.
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