The Federal Reserve's policy committee is split on the strength of the U.S. labour market, raising the possibility that the central bank could move to raise interest rates sooner than many on Wall Street currently expect.
There remains little doubt that the Fed will leave its benchmark lending rate unchanged for the rest of this year and into 2015. Yet the minutes of the committee's July meeting, released Wednesday, show divisions over the timing of the move are broader than previously thought. Bond yields rose after the release, as investors quickly recalibrated their expectations for Fed policy.
Philadelphia Fed president Charles Plosser cast the lone dissenting vote in July, but the minutes show other policy makers share his view that the economy could be growing faster than the Fed realizes. The minutes portray a lively debate about the pace of hiring amidst a general agreement that improvement is happening faster than most of the committee's members had expected.
"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. In fact, "some participants" already think the economy is strong enough to "call for a relatively prompt" move toward a higher benchmark rate to get ahead of a jump in inflation, the minutes said.
The unemployment rate was 6.2 per cent in July, down from 6.6 per cent at the start of the year and effectively at the level Fed policy makers predicted it would touch at the end of 2014. Employers added more than 200,000 jobs for six consecutive months through July, forming one of the most consistently strong stretches of job creation on record.
Nonetheless, many of the Fed's leaders, including the chair, Janet Yellen, are skeptical the standard measures used to monitor the labour market are sending a true signal. The minutes note that "many" participants were concerned about the "large gap" between the broad unemployment rate and elevated levels of longer-term unemployment and part-time workers seeking more hours and a low participation rate. The policy committee ultimately voted nine to one to leave its stimulative policies in place, citing "significant underutilization of labour resources."
The suggestion in the minutes that the consensus for aggressive monetary stimulus is eroding will put a brighter spotlight on Ms. Yellen's speech Friday at the annual gathering of central bankers and economists in Jackson Hole, Wyo. The event has emerged as an important one on the Fed calendar because previous chairmen used it to signal a shift in policy or outlook. The theme of this year's symposium is on labour markets.
"The tone of the minutes were clearly more hawkish than expected," said Adrian Miller, director of fixed income strategy at GMP Securities in New York. "It seems the committee may be closer to a rate hike decision than Chair Yellen's recent comments would suggest."
The Fed already has made clear that it intends to end its extraordinary bond-buying program in October, reflecting confidence in the economy's momentum. The next question is when to raise the benchmark rate, which has been pinned effectively at zero since the end of 2008.
While opinions vary, Wall Street economists generally were predicting the first increase will come no sooner than June of next year. Mr. Miller said the minutes increase the likelihood that the Fed will raise interest rates in the second quarter of 2015. Economists at BNP Paribas, who predicted earlier this year that the benchmark rate would rise next summer, acknowledged there is now a "risk" the Fed could move as early as the second quarter.
Fed officials discussed the mechanics for lifting their benchmark fed funds rate, which sets the price for overnight loans between financial institutions. The minutes show that the majority on the committee believe they can pull the fed funds rate higher by raising the rate the Fed pays on excess bank reserves.