Consensus building around June tightening

March 2, 2015 09:36 AM

Janet Yellen's premium on consensus may lead to a Federal Reserve decision the chair hasn't yet endorsed, as a near majority aligns in favor of a possible June interest rate hike.

Seven of the Fed's current 17 members have now said 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 will turn higher.

By contrast, there's a dwindling core of officials who say publicly that the economy and labor markets in particular still have a long way to go -- only four Fed members have in recent weeks clearly said that rate hikes won't be appropriate until much later in the year or even into 2016.

The five members of the Fed's Washington-based board of governors, including Yellen, have spoken less definitively, though governors includingJerome Powell have said they expected strong job growth to continue. Not all of the seven who point to June vote this year on the Fed's ten-member policy setting committee, but all participate in policy discussions.

The Fed is likely at its March 17th and 18th policy meeting 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 say.

"It's likely 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 will be one moreFed meeting, in April, 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 press conference after its meeting.

tockton said he personally 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 Fedboard.

The Fed hasn't raised interest rates since 2006, and Yellen's career-long focus on labor markets has led some including Stockton to say 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.

Data on Fed funds futures contracts collected by CME Group's Fedwatch have shifted between September and October over the past week as the likely month of the Fed's initial increase.

Page 1 of 2
About the Author