US FOMC minutes push first rate hike into H2

The minutes of the late April FOMC meeting revealed that most officials still believed the weakness in first-quarter activity was "partly or even largely transitory". Regardless of whether it was transitory or more persistent, many officials "thought it unlikely that the data available in June would provide sufficient confirmation" of a rebound to begin raising rates at that FOMC meeting. At this stage, that is not much of a surprise.

Most economists already expect the Fed to wait until September. The rebound in April payrolls wasn't strong enough to put June back on the table and the weakness in April's retail sales and manufacturing output figures probably made July an unlikely prospect too.

There were one or two isolated signs of hawkishness in the minutes, which noted that core inflation may have firmed and that "larger wage gains were also reported in some regions". On the other hand, a few participants wanted to add more monetary stimulus and were firmly against tightening policy in the near term. The upshot is that the Fed is still in wait-and-see mode.

One concern that has surfaced before is that officials are worried even a small first rate hike could trigger a much bigger rise in long-term interest rates via a jump in the term premium. This comes through in these minutes again, with officials worried that bond prices could exhibit greater volatility now. Those concerns are understood but, with other global central banks still buying bonds, any increase in US Treasury yields is expected to be fairly gradual.

"Overall, while rates may not rise as soon or as high as analysts previously expected for this year and still anticipate that rising wage growth and core price inflation will prompt a much more aggressive monetary tightening next year. Indeed, the fed funds rate is likely to be close to 3.0% by end-2016" according to Capital Economics.