Fed Minutes Point to Rate Hike ‘Relatively Soon’

The Federal Open Market Committee (FOMC) meetings in 2016 so far have all left interest rates unchanged. However, that hasn't stopped the guessing game that always surrounds the FOMC meeting will the Federal Reserve interest rate be hiked this year? Speaking at a conference organized by the Federal Reserve Bank of Boston, Yellen made no mention of when the central bank might raise its benchmark interest rate. Fed officials have been divided over the right moment to act, with three dissenting from the decision to leave rates unchanged last month.

Yellen did not provide any hints about the central bank’s thinking. Instead, she focused her remarks on the ways that the Great Recession — and the unexpectedly slow growth that has followed — could reshape economic thinking. The central bank has grown increasingly sympathetic to the possibility that economic growth will remain tepid for years to come. As a result, Fed officials have lowered their expectations for how much they will raise interest rates in the future. 

A fast-growing economy also could encourage individuals who have stopped looking for work to start looking again, expanding the labor force, national income and growth prospects. Moreover, running the economy hot could encourage higher levels of research and development and increase incentives for new business formations.

Although Fed officials may still be debating the precise timing of a rate hike, they largely agree that future increases will probably be made gradually. Officials have repeatedly emphasized that they will raise rates more quickly if the economy picks up speed but also slow down if the recovery proves weaker than expected. Ms. Yellen didn't directly address looming monetary policy decisions, such as whether the Fed will raise short-term interest rates before year-end. She also avoided a short-term diagnosis of the economy's performance, something of great interest in financial markets.

Central bank officials are debating the best strategy for approaching such a slow recovery. In minutes of the Fed’s meeting last month, some argued against raising rates to give the job market time to strengthen while inflation remains low. Hiring has been remarkably solid this year, and many workers are joining the labor force.

The Fed has maintained in the recent days that an interest rate hike is likely to arrive before the year ends. Since the US economy is nearing the Fed’s growth targets, Janet Yellen, Fed Chair, has noted last month that the chances for a second interest rate hike after almost 10 years had strengthened.