The New York Times

20 May 2015

Economic weakness in the early months of the year has persuaded most Federal Reserve officials that June is probably too soon to start raising the Fed’s benchmark interest rate. But they are not planning to wait much longer.

Officials at the Fed’s most recent policy-making meeting, in late April, described the slow start to the year as mostly caused by temporary factors like a cold winter and disruptions at West Coast ports, and they generally predicted a rebound.

An account of the meeting, released after the standard three-week delay, said that most of the Fed officials “thought it unlikely that the data available by June would provide sufficient confirmation” that stronger growth had returned.

The minutes also suggested, however, that policy makers are ready to move as soon as that evidence has accumulated. Surveys of analysts show that most believe the Fed, which sets monetary policy through a committee consisting of as many as seven Washington-based officials and presidents of the 12 regional Fed banks, will start raising rates in September, though some do not expect an increase until next year.

“What is not surprising is that most ruled out a rate hike in June; what is more surprising is that most would not rule it out,” Eric Green, head of economic research at TD Securities, wrote Wednesday in a note to clients after publication of the minutes. “It affirms the point that the threshold to raise rates is very low and the bias to do so very high.”

The April meeting passed quietly as the Fed waited for clarity about the health of the economy. Among the puzzles is the slow pace of consumer spending. The minutes noted an expected boost from lower oil prices had failed to materialize.

That trend has continued since the meeting. The Commerce Department reported last week that the level of retail sales was unchanged in April. Some Fed officials are worried about the slowdown, particularly in consumer spending, which has been viewed as a bright spot in the current economic expansion.

“Their expectations of a moderate expansion of economic activity in the medium term, combined with further improvements in labor market conditions, rested largely on a scenario in which consumer spending grows robustly despite softness in other components of aggregate demand,” the minutes reported.

There was also discussion about whether the Fed should press to increase inflation above its current target of 2 percent.

Investors are betting that growth will continue to fall short of the Fed’s predictions, forcing the central bank to wait longer before raising interest rates. Measures of market expectations derived from asset prices generally show that investors expect at most a single rate increase before the end of the year.

“In our view, it seems that the disappointing start to 2015 and the benign inflation backdrop will likely push the first move back until 2016,” said Patrick Maldari, a fixed income specialist at Aberdeen Asset Management, a Scottish firm.

Such pessimism has been validated repeatedly in recent years. Indeed, Fed officials at the beginning of this year expected to raise rates in June.

But there was little sign such doubts were gaining traction in the internal debate about the timing of a rise in short-term rates, which the Fed has held near zero since December 2008 in a bid to stimulate economic activity.

The account of the meeting acknowledged that inflation remained sluggish, undercutting the need for higher rates to slow price increases, and there was general agreement that the improvement of labor market conditions slowed in recent months.

The Fed’s outlook, however, remains optimistic. “Most participants expected that, following the slowdown during the first quarter, real economic activity would resume expansion at a moderate pace, and that labor market conditions would improve further,” the minutes said.

The account also said Fed officials were confident in their ability to raise interest rates without disrupting financial markets. The Fed does not want to raise rates in the traditional manner, by draining money from the financial system. Instead it plans to pay banks to limit their lending activity, an untried approach.

Investors are nervous about the mechanics of that experiment, particularly because the Fed continues to tinker with the details. There is also concern about a repeat of the market’s panicked reaction in the summer of 2013, when Ben S. Bernanke, then the chairman, first hinted the Fed was moving to unwind its stimulus campaign.

The minutes sought to offer reassurance that test runs and extensive planning “had created conditions under which policy normalization would likely proceed smoothly once it commences.”