The members of the US Federal Reserve Open Market Committee (FOMC) were divided at its last meeting over the potential timing of the next interest rate rise.
At the meeting held on July 26-27, the FOMC agreed to hold interest rates at the current level of between 0.25-0.5 per cent, but the minutes of the meeting show a division among the members.
A number judged that with inflation continuing to run below the 2 per cent target, “it was appropriate to wait for additional information that would allow them to evaluate the underlying momentum in economic activity”.
As a result, they “preferred to defer another increase in the federal funds rate until they were more confident that inflation was moving closer to 2 percent on a sustained basis”.
In contrast, however, other participants viewed recent economic developments as suggesting labour market conditions were close to maximum employment and that inflation would continue to rise.
The minutes stated: “Given their economic outlook, they judged that another increase in the federal funds rate was or would soon be warranted, with a couple of them advocating an increase at this meeting.
“In addition, several expressed concern that an extended period of low interest rates risked intensifying incentives for investors to reach for yield and could lead to the misallocation of capital and mispricing of risk, with possible adverse consequences for financial stability.”
The split between members raises the possibility that a further rate rise in the US could happen sooner than expected, in spite of Brexit potentially holding some longer-term uncertainty.
In the minutes the FOMC focused on the consequences of Brexit on the US market, highlighting while it had created some initial market volatility this had reversed and as a result “appeared likely to have little effect on the US economic outlook in the near term”.
But in the longer term, however, some members suggested that as a consequence of Brexit economic growth in the United Kingdom and, to a lesser extent, in the euro area would likely be slower than previously anticipated, while the exit process was expected to “entail an extended period of negotiations that, in the view of most participants, had the potential to increase the political and economic uncertainties in that region”.
In addition several members “also saw the possibility that complications during the exit process could result in spells of elevated volatility in global financial markets”.
