MercoPress. South Atlantic News Agency

Fed approaching interest rate hike but 'reasonable confidence' still short

Most Fed policymakers “judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point”

An improving job market edged the US Federal Reserve closer to an interest rate hike at its July meeting even as policymakers continued to express broad concerns about lagging inflation and the weak state of the world economy, according to minutes released on Wednesday.

 One Fed policymaker was ready to vote for a rate hike at the July 28-29 meeting, while a group of others “viewed the economic conditions for beginning to increase the target range for the federal funds rate as having been met or were confident that they would be met shortly,” according to the minutes.

That sentiment, combined with a broader recognition among “many members” that full employment was close, led the committee to say in its policy statement that it only needed to see “some” more improvement in labor markets before hiking rates.

Most Fed policymakers “judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point,” the minutes said.

At the same time, “some” officials said economic reports had not yet provided the central bank the “reasonable confidence” it has been seeking that inflation will drift toward the Fed's annual 2% target over the medium-term.

Normally, a lower unemployment rate, for example, means fewer available workers, forcing employers to raise wages. But, “several members noted that higher rates of resource utilization appear to have had only very limited effects to date on wages and prices.”

Policymakers “cited evidence” that the response of inflation to reduced slack in the economy “might be attenuated and expressed concern about risks of further downward pressure on inflation from international developments.”

Economic turmoil in the euro zone and China has strengthened the dollar, making imports cheaper for US consumers and keeping inflation below the Fed's target. And the Labor Department reported earlier Wednesday that consumer prices rose 0.1% in July, less than economists expected, though inflation rose more sharply the prior two months.

Still, “most” Fed policymakers continued to expect the effects of the strong dollar and low oil prices to “abate,” nudging inflation toward the Fed’s goal. And “many” officials said lingering weakness in the labor market -- such as part-time employees who prefer full-time jobs – “would be largely eliminated in the near-term if economic activity evolved as they expected.”

Some noted the “significant progress” the economy has made over the past few years and warned against “overemphasizing month-to-month changes in incoming data.”. A couple of officials worried that delaying a rate hike further eventually could lead to “an undesirable increase in inflation or have adverse consequences for financial stability.”