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May 24, 2017

Fed Sounds Note of Caution on Rising Interest Rates: NYT | Economy on May 24, 2017
Binyamin Appelbaum

Janet L. Yellen, chairwoman of the Federal Reserve, speaking at a conference at Brown University this month. On Wednesday, the Fed released an account of its early May meeting. Michael Dwyer/Associated Press
WASHINGTON — The account of the Federal Reserve’s early May meeting, which the Fed published Wednesday, suggested the decision to raise interest rates in June still hangs in the balance.
“Members generally judged that it would be prudent to await additional evidence indicating that the recent slowdown in the pace of economic activity had been transitory before taking another step in removing accommodation,” the Fed said in an account, released after a standard three–week delay.
The account also described in some detail a potential plan for reducing the Fed’s asset holdings and it reiterated that “it likely would be appropriate” to begin that process by the end of the year.
Fed officials remained optimistic about the economic outlook, and in particular that they expected a rebound in consumer spending, according to the account. That was in keeping with the Fed’s policy statement after the May meeting, which said the first-quarter slowdown “was likely to be transitory.”
There was general support for a rate increase if the economic data improved. The question is whether officials will see enough evidence of improvement before the June meeting.
The account said most officials at the meeting of the Federal Open Market Committee, the Fed’s policy arm, “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 removing some policy accommodation.”
The Fed raised its benchmark rate to a range between 0.75 percent and 1 percent at its March meeting, the third increase since the financial crisis. Rates remain at a low level that supports economic growth by encouraging borrowing and risk-taking. The Fed is gradually reducing those incentives by raising rates because it judges that the economy is expanding at roughly the maximum sustainable pace.
There are already some signs of improvement. A few days after the meeting, the government reported strong job growth in April, and economic analysts see evidence that the economy is growing more quickly in the second quarter. But the Fed will meet before the end of the quarter.
Before the release of the minutes, financial investors put the chances of a June rate increase at roughly 80 percent.
Robert Kaplan, president of the Federal Reserve Bank of Dallas, said Monday that he still expected the Fed to raise rates two more times this year, but he emphasized the need for patience.
“I intend to be patient in critically assessing upcoming data to evaluate whether we are continuing to make progress in reaching our inflation objective,” Mr. Kaplan said in a paper on current policy.
The meeting account also described a plan for reducing the Fed’s asset holdings which it said was discussed and was viewed favorably by “nearly all” Fed officials.
The Fed holds more than $4 trillion in Treasuries and mortgage-backed securities that it accumulated to put additional downward pressure on borrowing costs for businesses and consumers.
The Fed plans to reduce its holdings without selling the securities. Instead, as securities mature, the Fed will keep the proceeds rather than its current policy of investing in new securities.
Under the proposed plan, the Fed would begin by keeping a fixed amount of the monthly proceeds from maturing securities, then increase the cap every three months until it had stopped reinvesting any proceeds. The entire schedule, including the targets, would be detailed in advance.