Hints of consensus at Federal Reserve on rates

The Federal Reserve's top officials headed into a pivotal meeting last week divided over whether to begin withdrawing its extraordinary stimulus of the U.S. economy - and decided to leave it in place. But early remarks from key players over the weekend could hint at the beginnings of a consensus to finally pull the plug.

The first Fed officials to speak were the heads of the reserve banks of San Francisco, St. Louis and Richmond. They are among the 12 regional bank presidents who, along with the Washington-based board of governors, make up the Fed's top brass and steer the ship of the nation's economy.

The officials are led by Fed Chair Janet Yellen, but everyone weighs in. Before making a change in policy - especially such a major one as raising the target interest rate for the first time in nearly a decade - Yellen has to forge a consensus among her colleagues.

Taken together, the views of the three officials who spoke over the weekend span almost the entire spectrum of Fed philosophy, yet their public statements hit remarkably similar notes.

The central bank's top brass has repeatedly and explicitly signaled that it expects to raise its benchmark interest rate this year. The Fed slashed rates to zero during the darkest days of the financial crisis and has kept them there ever since in hopes of fostering a stronger recovery.

With the unemployment rate at 5.1 percent - nearly half the peak following the recession - many analysts had believed the Fed would finally make the move at last week's meeting. But the central bank held off, citing little fear of the sudden spike in prices or wages that low interest rates can stir up but plenty to worry about in the global economy.

The question now is: If not September, when? The Fed meets two more times this year, in October and December. Is the Fed still willing to end the era of easy money before saying goodbye to 2015?

Richmond Fed President Jeffrey Lacker is one of the most outspoken opponents of the Fed's crisis-era stimulus and the lone dissenter from the decision to keep its rate at zero last week. St. Louis Fed President James Bullard is a swing voter who has warned about the dangers of phasing out stimulus too quickly but more recently has argued in favor of a rate increase. Meanwhile, San Francisco Fed President John Williams has been a staunch supporter of easy money.

In the parlance of Fedwatchers, they range in views from hawk to dove. Yet the answer from all three to whether the central bank should raise rates this year was as close to a definitive yes as an economist will likely ever provide.

First and foremost, they pointed to the unemployment rate as well as a grab bag of other factors, including consumer spending and housing. All three painted a picture of a U.S. recovery that is chugging merrily along, albeit still not firing on all cylinders.

Next, they concluded that the risk from China's slowing growth and the subsequent turmoil in financial markets was relatively small. How to interpret those events was one of the key questions in the Fed's meeting last week, and it seems like officials may be settling on a narrative. Williams described some of the commentary over the state of affairs in the world's second-largest economy as "downright apocalyptic." In an earlier speech, which he cited in his public statement over the weekend, Lacker concluded that the turmoil had "limited implications" for monetary policy. Bullard said the Fed itself was contributing to global market uncertainty.

And finally, all three emphasized that, although the Fed's first rate increase has become fraught with significance, it will actually be quite small. The historical norm for the Fed's target rate is 4 percent. A rate increase tomorrow would bring it from zero to 0.25 percent, meaning that the central bank's stance would still be feeding plenty of stimulus into the economy. In other words, even if the Fed does less, it will be still be doing more than it has at almost any other period in U.S. history.

Expect to hear from more Fed officials over the next two weeks, including a major speech by Yellen on Thursday. Despite these early notes of agreement, documents from the Fed's meeting last week show the debate is still raging over what to do next.