What We Learned About Federal Reserve Interest Rates in Today's Minutes

By Diane Alter, Contributing Writer, Money Morning • April 6, 2016

When it comes to hiking U.S. Federal Reserve interest rates, Fed officials remain divided. That's the biggest thing we learned today (Wednesday) from the Federal Reserve minutes for the Fed's March 15-16 meeting.

The Federal Reserve minutes were released at 2:00 p.m. today. It was revealed that during the FOMC meeting in March, several members maintained a cautious approach for raising rates is prudent. They said that raising Federal Reserve interest rates as soon as April would signal a sense of urgency they did not think was appropriate.

In contrast, some other Fed participants indicated a rate hike at the committee's next meeting (April 26-27) might be warranted. They think the Fed should raise rates if incoming economic data remains consistent with their expectations for moderate growth in output. They also said a strengthening labor market and inflation rising to 2% would be cause for a rate hike.

Other key highlights from the minutes included:

• Policymakers continued to project that real GDP would expand at a somewhat faster pace than potential output in 2016 through 2018. An increase in consumer spending will support robust growth.
• A number of participants said they expect declines in exports to continue to subtract from real GDP growth. That reflects weak foreign activity as well as the earlier appreciation of the dollar.
• The outlook for growth abroad dimmed in recent months, suggesting a more persistent drag on the growth of U.S. exports.
• Inflation risks were still seen as weighted to the downside. That reflects the possibility that longer-term inflation expectations may have edged down. The foreign exchange value of the dollar could rise substantially, which would put additional downward pressure on inflation.
• A couple of participants commented that emerging market economies faced an extended period of less rapid export growth, reflecting slower economic growth in many advanced foreign economies and in China.
• It was also noted that weak growth abroad could lead to further appreciation of the dollar.
• In discussing domestic business conditions, several participants said the retail and services sectors were mostly strong. The slump in manufacturing activity likely bottomed out. But a number of participants commented that previous declines in commodity and energy prices, along with the earlier appreciation of the dollar and weak foreign activity, continued to weigh on manufacturing activity.

Now investors are starting to focus on the next FOMC meeting in April to see if there will be any change in Federal Reserve interest rates. Here's what investors need to know now...

What's Next for the Federal Reserve Interest Rates in 2016

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When the Fed left rates unchanged at last month's FOMC meeting, Chair Janet Yellen assured investors that the U.S. central bank would be cautious in raising Federal Reserve interest rates. Yellen said there are plenty of risks to its forecasts. Yellen also cut the central bank's forecast for rate hikes this year from four to two.

Last week, Yellen said a slower pace of tightening was justified due to global uncertainty. She added that she wasn't convinced recent price increases were a sure sign of improved economic activity. Markets interpreted that to be even more dovish than what they took away from Yellen's press conference and the Fed statement in March.

Because of last month's meeting, markets have low expectations for a rate hike this year. But hawkish words in today's minutes from some Fed officials who said the Fed could raise rates as early as April have left investors confused and on edge.

San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart recently said they are prepared for a rate hike this month. And Boston Fed President Eric Rosengren said the market is wrong to say one hike or no hikes this year.

Markets were broadly higher before the minutes were released and slipped moderately after the release. If the hawkish tone persists in the coming month, expect the markets to remain jittery.

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Related Articles:

• FOMC: Minutes of the Federal Open Market Committee
• MarketWatch: Fed Minutes Might Show Less Dovish Central Bank Than Advertised
• Reuters: Wall Street Flat Ahead of Fed Minutes