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VOL. 40 | NO. 20 | Friday, May 13, 2016

Fed's surprise message: June hike likely if economy improves

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WASHINGTON (AP) — Catching many investors off guard, the Federal Reserve made clear Wednesday that an interest rate hike in June is likely if the economy keeps improving.

The minutes of their most recent meeting in late April showed that Fed officials widely felt it would be time to raise rates at their June 14-15 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 in April to keep rates unchanged while noting that threats from the global slowdown had eased.

Given the suddenly increased likelihood that the Fed will raise rates at its next meeting, stocks turned lower and bond yields jumped after the minutes were released at 2 p.m. Eastern time.

Ernie Cecilia, chief investment officer of Bryn Mawr Trust, noted that many investors didn't think the Fed was inclined to raise rates in June and were surprised by Wednesday's release.

The minutes said some Fed officials did express concerns at the April meeting that the economic data might not be clear enough by mid-June to determine whether a rate hike was warranted. But that view was balanced against the belief of other officials that the data would be strong enough to justify a June hike.

Even at the April meeting, Fed officials were encouraged by developments in the U.S. economy and financial markets, the minutes showed. Several participants suggested that the risks to the economic outlook were now "roughly balanced."

The Fed had last signaled its belief that risks were balanced in December when it hiked rates for the first time in nearly a decade, raising them from record lows near zero. But after turbulence struck financial markets and the global economy weakened, the Fed removed that assessment from its descriptions of the economy and held rates steady.

Until now, many economists have assumed that the Fed would leave rates alone at its June meeting. Some had noted that the Fed will meet just a week before Britain votes on whether to leave the European Union — a possibility dubbed Brexit — and that the central bank might want to avoid destabilizing markets with a rate hike.

"June is very much alive, but Brexit remains a big hurdle," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Yet the Fed might want to go ahead with another rate hike given signs that the economy has been recovering in the second quarter after nearly stalling in the first three months of the year. Analysts say they think annualized growth in the current quarter will accelerate to around 2 percent or better.

In addition, inflation, which has been running below the Fed's 2 percent target for four years, has shown signs of accelerating as energy prices rebound from a steep drop at the beginning of the year. The government reported Tuesday that the consumer price index jumped 0.4 percent in April, reflecting higher energy costs.

In remarks this week, three Fed officials raised the prospects of a June rate hike.

John Williams, president of the Fed's San Francisco regional bank, called June a "live" meeting. Atlanta Fed President Dennis Lockhart said of the possibility of a June hike, "I wouldn't take it off the table."

Robert Kaplan, president of the Fed's Dallas regional bank, said Tuesday that "in the not-too-distant future" the Fed should be raising rates. Speaking in Midland, Texas, Kaplan said he may advocate for a move in June or July.

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