Federal Reserve officials expected at their policy meeting this month that it would "soon be appropriate" to raise short-term interest rates, a signal the U.S. central bank could move in June at its next gathering.
The Fed also moved toward a consensus on a proposal to start gradually shrinking its $4.5 trillion in holdings of Treasury and mortgage securities later in the year, according to minutes of the gathering released Wednesday. Under the approach discussed, they would allow increasing amounts of those securities to mature over time, without reinvesting the proceeds.
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Fed officials left their benchmark short-term interest rates unchanged within a range between 0.75% and 1% at the meeting May 2-3. Several Fed officials in recent weeks have said they believe the economy will still be strong enough to warrant two more quarter-percentage-point rate increases this year.
Officials were inclined to stick to that scenario even though the economy appeared to stumble in the first quarter, the minutes showed. Officials saw that slowdown as likely to be transitory. And while some expressed concern about recent softness in inflation, it wasn't enough to knock them off track.
Their next meeting is June 13-14, which will be followed by a press conference with Fed Chairwoman Janet Yellen.
"Most participants judged that if economic information came in about in line with their expectations, it would soon be appropriate for the committee to take another step" in raising rates, the minutes said.
Before the minutes were released, "we thought there was a pretty good chance" of a rate increase in June, said Michael Feroli, chief U.S. economist at J.P. Morgan Chase & Co. "Saying 'soon' says that that is the committee's intention, as well. They said 'soon' in the January minutes, and they went in March."
Markets edged higher after the release of the minutes, which did little to change investors' view of the immediate rate outlook. The Dow Jones Industrial Average rose 74.51 points, or 0.36%, to 21012.42. The yield on the benchmark 10-year U.S. Treasury note fell to 2.266%, down from 2.285% Tuesday. Yields fall as prices rise.
Late Wednesday, after the minutes were released, traders in futures markets placed about a 79% probability on a Fed rate increase by June, according to CME Group.
Officials expected job gains, rising household income and wealth, and buoyant consumer sentiment to bolster spending in the months ahead, and they took greater comfort in improvements in the housing market and business investment.
"Participants generally indicated their assessments of the medium term economic outlook had changed little since the March meeting," the minutes said.
With their forecasts relatively stable, officials effectively believed they had a green light to move again.
Inflation has wobbled in recent months, a cause of concern for some officials, but a threat most were prepared to look past for now. The Fed's preferred inflation gauge, the price index for personal-consumption expenditures, briefly exceeded the Fed's annual 2% target in February but posted a greater-than-expected drop in March, with annual prices up 1.8%. A separate inflation gauge released since the Fed meeting, the Labor Department's consumer-price index, also ebbed in April. Prices excluding food and energy were up 1.9% on the year, the first time the annual gain in core prices had been below 2% since October 2015.
Officials generally believed the deceleration in price pressures would prove temporary, though some expressed uncertainty about the greater-than-expected weakness.
The Fed will see two more inflation reports before the June meeting: the April reading of its preferred gauge on Tuesday and the May reading of the consumer-price index on June 14. It will also see the May employment report on June 3.
The uncertainty around the inflation outlook stands in contrast to labor markets. The April employment report, released days after the recent Fed meeting, showed steady hiring, with an average 185,000 jobs added monthly so far this year. The unemployment rate fell to 4.4%, at the bottom range of officials' expectations. The rate hasn't been lower since May 2001.
Some officials at the meeting said stronger hiring and wage gains and larger declines in the unemployment rate could warrant a faster pace of rate increases, but a few said the Fed could move more slowly than currently projected if continued declines in the unemployment rate didn't create obvious price pressures.
The central bank's discussion about how to wind down its portfolio, also known as its balance sheet, has picked up because the economy is moving closer to meeting the Fed's goals of steady, low inflation and maximum, sustainable employment.
Officials stopped adding to the balance sheet more than three years ago, but they have been reinvesting the proceeds of maturing assets to keep their holdings steady. Those reinvestments have helped to hold down long-term interest rates, and allowing them to roll off without reinvestment could push up long-term rates.
A Fed staff briefing on their latest proposals to shrink those holdings suggested tapering reinvestments of Treasury and mortgage securities by allowing a preset dollar amount of holdings to run off every month -- that is, by not reinvesting their proceeds. The amount of securities allowed to run off would initially be relatively small, and the Fed could then increase those amounts every quarter.
"Nearly all" officials agreed with this approach, which they believed would accomplish their goal of reducing the holdings in a gradual and predictable way, the minutes said.
Officials want to avoid a rerun of the 2013 "taper tantrum," when investor concerns over the Fed's decision to slow the pace of asset purchases roiled markets, leading to a large spike in Treasury yields and capital outflows from emerging-market economies.
Under the emerging scenario Fed officials have outlined in public speeches and interviews, the central bank would raise short-term interest rates two more times this year and then pause rate increases later in the year when they announce plans to set their balance-sheet wind-down into motion. A pause would allow the Fed to watch for any ill effects before resuming rate increases in 2018.
Officials have said they want the process to run quietly in the background once it starts, requiring adjustments only if the economy deteriorates significantly. The balance-sheet wind-down should be predictable and boring with lots of advance notice to markets, "the policy equivalent of watching paint dry," said Philadelphia Fed President Patrick Harker on Tuesday.
Write to Nick Timiraos at firstname.lastname@example.org
(END) Dow Jones Newswires
May 24, 2017 18:05 ET (22:05 GMT)