Fed might soon be ready for a hawkish turn

Fed officials have indicated that conditions are ripe for a possible rate increase

According to a report on CBC News, Federal Reserve officials believed last month that immediate risks to the US economy had receded, and that “an interest rate increase could soon be warranted”.

The minutes of their July 26-27 meeting show that they were encouraged by a rebound in job growth. Also noteworthy was stabilization of the financial markets after a bout of post-Brexit turbulence that had persisted for weeks. Those developments told the officials, according to the minutes, that a rate increase "was or would soon be warranted".

Still, they are held back by the painfully slow rate of inflation, which for two years has been below the central bank’s target of 2%.

The minutes mirror sentiments behind a statement made by William Dudley, president of the Federal Reserve Bank of New York and a close ally of Fed Chair Janet Yellen, in a TV interview this week.  He said a September rate hike is “possible” because of forecasts that US job growth would continue and the economy would pick up, though he stressed that any policy action would depend on the most recent economic data.

In recent months, turbulence in financial markets, concerns about China, and weakening global growth led the Fed to keep rates steady. Also worrisome are the tepid pace of U.S. growth, weakness in worker productivity, and long-term consequences of Brexit, not to mention low inflation.

Yellen will be giving a speech on August 26 to an annual conference of central bankers in Jackson Hole, Wyoming – a speech that many investors will doubtlessly listen to very carefully for clues about a rate hike.

According to the minutes of the July meeting of Fed officials, “a couple” of them advocated a rate increase, while the majority agreed that a “wait and see” approach would be better. However, they also acknowledged that waiting too long would be risky: labor market conditions could tighten so much that inflation would spike, forcing a more drastic series of rate hikes that could jeopardize the recovery.

So as of now, although it’s still unclear if and when a rate hike would occur, the needle seems to be moving away from “if” and closer to “when”.

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