Fed leaves door open to September rate hike

The Federal Reserve is close to viewing the U.S. economy as strong enough to withstand an interest rate increase.

July meeting minutes released by the Fed on Wednesday found that most Fed officials believe that while the economy is not quite ready for a long-awaited interest rate boost, they see it reaching that point soon.

{mosads}Officials generally saw improvements in the labor market — though there was room for further gains — as well as signs the dismal first quarter for the economy was a temporary blip rather than a troubling trend.

While the minutes offered little indication on how quickly the Fed might act, it suggested that central bank officials are getting close to pulling the trigger.

“Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point,” the minutes stated.

The Fed is next set to meet in September, in a closely watched meeting that many market analysts believe could play host to the first interest rate increase since the financial crisis.

A Fed move to increase rates after years of near-zero rates looms large on a busy fall in Washington, as lawmakers will return in September with a full docket of major economic issues to tackle. Lawmakers will need to pass government funding legislation by the end of September to avoid a government shutdown, and will likely need to pass legislation addressing the debt limit sometime before the end of the year.

The minutes suggested Fed officials might be getting close to an interest rate rise, though they offered few clues as to how aggressively the central bank could act. The minutes showed the July meeting continued the debate among Fed officials about the relative health of the U.S. economy, how much more it can be expected to grow, and how much attention to pay to inflation at this point.

Officials said at the July meeting that they needed further information about the economy before deciding on a policy move.

One of the troubling factors facing the Fed is the slim to nonexistent growth in wages, even as the overall job market has improved. Some Fed officials believed that when the economy picks up, as they expected in the coming months, that would bring with it additional wage increases.

However, others wondered if the slow growth in wages suggested the unemployment rate still could fall significantly further, as slack in the labor market was holding back wage growth.

On inflation, some Fed officials wondered if the particularly low rates for inflation should push back against the notion of a rate surge. The Fed has said it expects inflation will gradually move back toward its 2 percent target, although it hasn’t moved significantly yet.

But some Fed officials made the argument that so long as the central bank keeps interest rates near zero, it is limited in its policy tools since it cannot effectively lower rates any further with traditional measures.