Fed officials signal markets may be wrong to doubt June hike

Two regional Federal Reserve presidents said that an interest rate increase should be on the table next month, pushing back against market expectations that the U.S. central bank will keep policy on hold for a fourth consecutive meeting.

Atlanta Fed chief Dennis Lockhart and San Francisco’s John Williams both signaled on Tuesday that the U.S. economy could warrant a rate hike when the policy setting Federal Open Market Committee gathers on June 14-15. Investors currently only see a 12 percent chance of such a move, according to pricing in interest rate futures contracts.

“I would put more probability on it being a real option,” Lockhart told reporters at the Atlanta Fed’s financial markets conference at Amelia Island, Florida, when asked about the low implied odds of a move next month. “The communication of committee participants and members between now and mid-June obviously should try to prepare the markets for at least a realistic range of possibilities” for the next policy meeting.

Fed officials left their target range for the benchmark policy rate unchanged at 0.25 percent to 0.5 percent when they met last week. In their accompanying policy statement they also omitted a previous warning that “global economic and financial developments continue to pose risks,” instead saying officials will “closely monitor” the world situation.

“It is desirable that financial markets and policymakers be reasonably well aligned,” said Lockhart, a non-voting member of the FOMC this year. “I don’t think it is at all constructive to have a lot of volatility because of surprising the markets.”

In quarterly forecasts submitted in March, the median projection from FOMC members was for two quarter-point interest rate increases in 2016, down from the four projected in December. In contrast, prices for federal funds futures contracts imply just one move this year. Fed officials in June will update their projections for the appropriate pace of rate increases, known as the dot plot because each estimate is represented as a dot on a chart.

Lockhart said he wasn’t leaning for or against a June increase until he sees more data, adding that two interest-rate increases this year are “certainly possible.”

Williams, a former head of research to Fed Chair Janet Yellen, said he would support raising rates at the next meeting, provided the economy stayed on track.

“In my view, yes, it would be appropriate, given all of the things that we’ve talked about, to go that next step,” Williams told Kathleen Hays in an interview on Bloomberg Radio. “But you know, a lot can happen between now and June.” Williams is also not an FOMC voter this year.

The U.S. economy slowed in the first quarter after a stronger dollar and weaker growth abroad dented demand for U.S. exports. Williams said he expects growth of around 2 percent this year, but acknowledged that investors were dwelling on what could go wrong.

“That’s priced into the market, the possibility of a negative scenario, that seems to get a lot of weight in investors’ minds,” he said. “My view, that we should be gradually raising rates the rest of the year, is based on the notion that we follow this baseline scenario, that the data continue to come in, show the U.S. economy continues to be on the good track.” (Bloomberg)