Fed Minutes Show Some Pushing For Rate Hike Sooner Rather Than Later

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Federal Reserve Chair Janet Yellen speaking at the International Monetary Fund in July. Then, Yellen said she doesn't see a need for the Fed to start raising interest rates to address the risk that extremely low rates could destabilize the financial system. (AP Photo/Susan Walsh)

Before Wednesday, if you asked the average Fed watcher when she expected the central bank to raise interest rates she would likely have said: mid-2015. However, the minutes chronicling the Federal Open Market Committee's July meeting show that point is up for debate among Fed governors.

The minutes, released Wednesday afternoon, show the FOMC becoming increasingly divided about the ideal timeline for a rate hike and the appropriate means for communicating that timeline without spooking financial markets.

Participants agreed that by and large the economy is improving and will continue its positive trajectory. The minutes stated that improvements in labor market conditions, a focus for the Fed, had been 'greater than anticipated' despite lingering concerns about labor utilization and wage growth. The minutes also stated that inflation, the second pillar of the FOMC's mandate, had 'firmed.' Most participants stated beliefs that move toward the 2% goal will continue, as will labor market progress.

The questions became: how fast? And what do we do about it?

'Many' committee members agreed a quicker than expected 'convergence' toward inflation and labor market goals might make it 'appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.' Some went so far as to say the progress is already 'sufficient to call for a relatively prompt move toward reducing policy accommodation.' These members were worried about 'overshooting' committee goals.

'These participants were increasingly uncomfortable with the Committee's forward guidance,' the minutes said. 'In their view, the guidance suggested a later initial increase in the target federal funds rate as well as lower future levels of the funds rate than they judged likely to be appropriate. They suggested that the guidance should more clearly communicate how policy-setting would respond to the evolution of economic data.'

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Most FOMC members, however, are waiting for more information. While most agreed the slump in first quarter real GDP was temporary some viewed it as adding to outlook uncertainty. Additionally, a number of members wondered just how quickly inflation will move back to 2%. Some said, 'Very slowly, thereby warranting a continuation of highly accommodative policy' for the foreseeable future.

In addition to questions of timing, there were some differences of opinion regarding exactly what interest rate tools to use when the time comes. 'Almost all' felt the federal funds rate should remain the key policy rate with a target range of 25 basis points for 'liftoff' - the initial rate hike - and beyond. A few, however, felt a combination of tools would be necessary.

Stock market response to the release was muted with the three major indices maintaining gains established before the 2 p.m. release. Near the end of the trading day the S&P 500 Index was up 0.3% to 1,988. The Dow Jones Industrial average was up 0.4% to 16,985. And The Nasdaq Composite was up 0.07% to 4.531.

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