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Published On: Wed, Aug 20th, 2014

Fed minutes: the labor market has made significant improvement, but it is still early for a rate hike

The minutes from the last policy meeting of the Fed indicated most policymakers gave credit to the “greater than expected” improvement in the labor market, but thought it is yet premature to go on with policy tightening.

The minutes from the last policy meeting of the Fed indicated most policymakers gave credit to the “greater than expected” improvement in the labor market, but thought it is yet premature to go on with policy tightening.

The Fed expressed delight with the faster than expected job market recovery but stated it is still early for a rate hike. According to the minutes of the July meeting, most policymakers agreed that employment improvements had been “greater than expected”. Central bankers wanted to give the economy a chance to gather more speed until they proceed to tightening.

In its last policy statement, Fed members stated there was “significant” slack in the labor market. The minutes released today, however, showed that a number of the policy-setting panel members felt that this description should be changed in the not so distant future, as the situation had significantly approached to its normal state.

Most central bankers agreed on the appropriateness of keeping the overnight federal funds rate as Fed’s main target. As of the question on when it would be appropriate to commence with interest rates increase, a big number of the Fed members shared the opinion that careful monitoring of the pace of inflation, economic activity and the tendencies on the labor market would eventually show when the time has come.

Targeting a range of a quarter percentage point for the federal funds rate was agreed by almost everybody in the policy-setting panel. The upper boundary of target ranges in the future would depend on the rate the Federal Reserve pays to commercial banks for their reserves kept as deposits at the institution. The range bottom would be equal to the one the Fed pays on reverse repos.

The information about prospective Fed rate hikes contained in interest rate futures has persistently indicated July next year as the most probable time for the first Fed tightening move. US stocks initially dropped after the minutes were released but gradually recovered. Meanwhile, the dollar made gains against other major currencies, and 10-year Treasury yields ticked up.

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