Forget the Taper, Some Fed Officials Talk Rate Hikes

February 19, 2014

Washington (Feb 19)  A small number of Fed officials said the central bank might need to raise short-term interest rates in the near future. Most still believe rate hikes wouldn’t be appropriate until 2015 or later. But the minutes indicate that the timing of the first increase has come onto the Fed’s agenda after years of interest rates pinned near zero.

“A few participants raised the possibility that it might be appropriate to increase the federal funds rate relatively soon,” according to minutes of the Jan. 28-29 meeting, released Wednesday after the customary three-week lag.

Chatter about raising interest rates didn’t initially spook markets. But stocks took a turn lower in the final trading hour. The Dow Jones Industrial Average edged slightly higher following the release of the minutes, but recently traded down 80 points, or 0.5%, to 16042. The S&P 500 dropped 0.7% to 1828 and the Nasdaq Composite fell 0.9% to 4235.

Overall, the minutes showed Fed officials appear on track to keep reducing the monthly bond-buying program at a measured pace, which explains the generally muted reaction in the markets.

“The FOMC minutes did not change the impression given by the statement three weeks ago and the chairwoman last week that a clear-cut weakening in the trend in growth or inflation, and not just because of the weather, would be required to deviate from the recent $10 billion per meeting tapering path,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics. “As expected, officials were relatively optimistic about the outlook three weeks ago and were fairly dismissive of the weaker-than-expected December employment report.”

Investors closely analyze the minutes for hints on future policy and how it may impact markets. The S&P 500 has dropped in five of the previous eight days the Fed has released meeting minutes, averaging a 0.24% drop, according to Bespoke Investment Group. Only once since January 2013 has the S&P 500 risen from the release of the minutes through the closing bell.

Source: blogs WSJ

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