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  2. ECONOMY
May 18, 2016 01:00 AM

Fed sets the stage for June action

Hazel Bradford
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    Bloomberg

    A hike in the federal funds rate at the June meeting of the Federal Open Market Committee is looking more likely, judging by the minutes of the April meeting released Wednesday.

    On April 27, FOMC members voted to keep the current 0.25% to 0.5% target range, citing slow economic growth in the first quarter of 2016. But most participants at that meeting judged that if economic growth data for the second quarter and labor market conditions continue to strengthen, without inflation concerns, “then it likely would be appropriate for the committee to increase the target range for the federal funds rate in June,” the minutes said.

    “It does feel like they are trying to prep the market as to more, rather than less, rate hikes this year,” said Putri Pascualy, managing director and senior credit strategist for Pacific Alternative Asset Management Co., in an interview. “I think the market is underrating the likelihood of a rate hike, as well as the speed. The risk here is that if the Fed does hike sooner, it would have a negative impact on equity markets,” Ms. Pascualy said.

    While emerging markets could also potentially be impacted, “the only mitigating factor to that is, because of the previous two rounds (of quantitative easing),” emerging markets have “been so beaten up, it's already taken its medicine,” she said.

    The minutes note the general agreement among FOMC participants “that the risks to the economic outlook posed by global economic and financial developments had receded over the intermeeting period.”

    The minutes also showed that during staff briefings and a discussion of the relationship between monetary policy and financial stability, FOMC participants credited more stringent regulatory and supervisory policies implemented since the financial crisis — including enhanced capital and liquidity requirements for some types of financial institutions — for “significantly increase(ing) the resilience of the financial system to shocks.”

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