The Fed left benchmark short-term U.S. rates unchanged at its last meeting in July but said near-term risks to the economy had diminished, leaving the door open for a possible rate hike this year.
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Markets will closely scrutinise the minutes of the Fed’s July meeting, due out at 1800 GMT on Wednesday (0400 Thursday AEST), for clues on the timing of any rate rises.
“Given their economic outlook, they judged that another increase in the federal funds rate was or would soon be warranted, with a couple of them advocating an increase in this meeting”, the minutes said. Dudley said that a rate hike as soon as September is “possible”. But many think the Fed will lack enough certainty to act, especially if inflation remains far below the Fed’s target.
The dollar retreated, while Asian index futures diverged, after minutes of the Federal Reserve’s last meeting reinforced speculation interest rates will stay lower for longer.
Investors had raised bets earlier this week for a rate increase this year after two Fed policymakers said the economic stars now appear to be aligning despite weak USA growth in the first half of 2016. “While a growing number of policymakers likely wouldn’t oppose lifting rates at the next meeting, the majority still seem keen to wait until the economy strengthens further and downside risks abate”.
Asian stocks edged up early on Thursday and the dollar fell after the Federal Reserve’s latest meeting minutes showed policymakers were in no hurry to add to USA borrowing costs.
“It’s the aftermath of the hawkish comments from Dudley”, said John Canavan, market strategist at Stone & McCarthy Research Associates in Princeton, New Jersey Yields on the two-year note, which is sensitive to traders’ views on Fed policy, were up fractionally at 0.754% after touching a three-week peak at 0.766% earlier Wednesday, according to Reuters data.
Dudley, an influential Federal Open Market Committee voter who is seen as closest on the board to Fed Chair Janet Yellen, was seen as having the most significant impact on Treasuries’ moves.
In a presentation prepared for delivery in St. Louis on Wednesday, he said there was no reason yet to conclude the US has shifted from the low-growth, low-inflation “regime” that makes low rates appropriate for what he has termed the “foreseeable future” – perhaps two and a half years. Many experts took that to mean the Fed wouldn’t raise rates anytime soon.
The dollar edged lower against the euro and the yen as traders pushed back the time-frame for Fed rate hikes. Esther George, president of the Kansas City Fed, dissented in favor of an immediate rate increase.
The Fed raised rates in December for the first time in almost a decade, but it has since kept rates unchanged amid financial market volatility, a global growth slowdown and tame USA inflation.
Fed officials have also expressed concern about the tepid pace of US growth, weakness in worker productivity, excessively low inflation and the long-term consequences of Britain’s vote in June to leave the European Union.
Investors will now focus on next week’s annual meeting of central bankers in Jackson Hole, Wyoming, a venue the Fed often uses to telegraph policy plans.
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“Just as moving interest rates too quickly can slow the economy, we should not lose sight of the fact that keeping rates too low for too long can also create risks”. Although the PMIs showed a rapid deterioration in labor market conditions, the number of people filing for jobless benefits fell -8.6k in the month of July, leaving the unemployment rate steady at 4.9%. Some Fed officials also expressed concerns that weak capital positions and sizable bad loans at some European banks could also weigh on the continent’s growth prospects.
