(Adds analyst quotes, details on Fed assessment of economy)
By Jason Lange
WASHINGTON Aug 20 The U.S. Federal Reserve
hinted on Wednesday that a surprisingly strong jobs market
recovery could lead it to raise interest rates earlier than it
had been anticipating.
At the same time, most Fed officials wanted further evidence
before changing their view on when rates should rise, according
to the minutes from the central bank's July 29-30 meeting.
"Labor market conditions had moved noticeably closer to
those viewed as normal in the longer run," the minutes said,
adding that policymakers "generally agreed" the job market was
healing faster than they had expected.
The Fed had said in its policy statement following the July
meeting that there was "significant" labor market slack, but the
minutes showed many members of its policy-setting panel thought
this characterization "might have to change before long."
"The committee as a whole has started to shift its stance,"
said Paul Dales, an economist at Capital Economics in London.
"The Fed has moved closer towards raising interest rates."
The central bank has held benchmark rates near zero since
December 2008, but has signaled it would likely begin to move
them up some time next year.
Yields for 10-year Treasury notes moved higher, while the
dollar firmed against the euro and the yen after release of the
minutes. Interest rate futures continued to point to a first
rate hike in July of next year, although the chances of an
earlier move ticked slightly higher.
Most Fed policymakers felt any change in their view on when
to start raising rates "would depend on further information on
the trajectories of economic activity, the labor market and
inflation," the minutes said.
Some officials worried a drop in U.S. gross domestic product
in the first quarter might signal the economy was weaker than
believed, despite the widely held view the decline was largely
due to bad weather and other temporary factors.
And several felt the low level of inflation warranted an
easy monetary policy stance.
Most of the debate, however, centered around the amount of
slack in the labor market, with many officials pointing to the
millions of workers who have been out of work for extended
periods or who are unable to find full-time employment.
"It's all about jobs, jobs, jobs - specifically well-paying
full-time jobs," said Putri Pascualy, credit strategist for
Pacific Alternative Asset Management Company in Irving,
PLANNING THE EXIT
The Fed has pledged to keep interest rates near zero for a
"considerable" period after it wraps up a bond-buying stimulus
program in October.
In a slight shift from the views expressed at the Fed's June
policy meeting, the minutes said "most" Fed officials supported
re-investing the maturing securities in the central bank's vast
portfolio until sometime after its first rate hike. The minutes
of the previous meeting said only that "many" supported this
The latest minutes also showed officials had largely agreed
on a framework for eventually raising rates, with almost all of
them agreeing it would be appropriate to retain the overnight
federal funds rate as their key target.
They also want to keep targeting a quarter-percentage point
range for the federal funds rate, which is currently at between
zero and 0.25 percent.
To establish the upper bound of future target ranges, most
policymakers expected to rely on the rate the Fed pays
commercial banks on the excess cash they park at the central
bank. The bottom of the range would be set at the same rate the
bank plans to pay on overnight reverse repurchase operations.
In reverse repos, the Fed borrows funds overnight from
banks, large money market mutual funds and others. The tool is
designed to mop up excess cash in the financial system which
could keep market rates too low if left in circulation.
(Reporting by Jason Lange in Washington; Additional reporting
by Michael Connor in New York; Editing by Paul Simao)