The Federal Reserve is not willing to say that higher U.S. rates are approaching, but the economic analysis illustrated in today's minutes of the July FOMC meeting only points in one direction.
The policy discussions among the committee members suggest that if economic conditions continue to improve the central bank could begin to tighten its monetary stance faster than the markets currently anticipate.
“Many participants noted that if convergence toward the committee’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated,” the minutes said.
Normalization of the Fed's monetary policy has three tracks. The end of quantitative easing, which the bank has said will take place in October, the return of the Fed Funds rate to more historical levels from its current 0.25 percent and the dissipation of the Fed's $4.4 trillion balance sheet.
It is the change in the Fed Funds rate, perhaps as early as the first quarter of 2015, that has excited speculation and helped drive the dollar to an almost twelve month high against the euro and its best level versus the yen since April. There was no mention of the timing of Fed Funds increase in the minutes.
The Fed's massive balance sheet of Treasuries and mortgage backed securities has been the object of intense consideration. It is practically impossible to reduce the Fed's holdings without pushing interest rates higher. Bond prices move in opposition to rates and if the central bank begins to sell its portfolio, it will drive down prices and drive up interest rate, the opposite of what the Fed wishes.
Most participants at the FOMC meeting were in favor of continued reinvestment of maturing bonds until sometime after the federal funds rate begins to rise. Some said “it could be helpful to retain the option to sell some assets” instead of letting they expire as they mature.
In July's FOMC statement the bank said that “economic activity rebounded in the second quarter” and “the likelihood of inflation running persistently below 2 percent has diminished somewhat.”
Employers added 209,000 jobs in July, the sixth straight month of more than 200,000 gains and the longest stretch since 1997. The jobless rate climbed 0.1 percent to 6.2 percent as more people returned to the job search. The labor force participation rate remained just 0.1 percent above its 35 year low of 62.8 percent.
The Federal Reserve's chosen inflation gauge, the personal consumption expenditures index, rose 1.6 percent in June from a year earlier. The core index was 1.5 percent higher.
Consumer prices in the CPI measure were 2 percent higher in July from a year earlier, after a 2.1 percent advance in June.
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