Why a Fed interest rate hike next month is looking increasingly likely

With the economy’s prospects brightening after a bleak winter, Federal Reserve policymakers are increasingly signaling they are ready to nudge up a key interest rate next month.

Fed Chairwoman Janet L. Yellen added to the speculation on Friday, saying that if the economy continued to improve as she expected, then it would be appropriate to “gradually and cautiously” raise the benchmark rate, “probably in the coming months.”

“It has been a slow recovery, but we’ve made a great deal of progress,” Yellen said during an appearance at Harvard University.

Yellen notably did nothing Friday to tamp down a growing sense among investors and analysts that a small rate increase would be announced at the Fed’s June 14-15 policymaking meeting.

FOR THE RECORD

11:55 a.m.: An earlier version of this article said Friday’s comments were Yellen’s last public remarks on monetary policy before the Fed’s June 15-16 meeting. She has a speech scheduled for June 6 and the Fed meeting is June 14-15.

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Those expectations have been fueled in recent days by new details from the Fed’s last meeting in April and comments from several central bank policymakers.

”She’s clearly joining the flock, but leaving her options open,” said economist Diane Swonk of DS Economics.

Swonk is forecasting a June rate increase but said Fed officials could decide to wait until July — but probably not any longer.

“They’re saying, ‘We’re ready to go. We can fiddle with the timing a bit, but we’re ready to go,’ ” she said.

Fed officials may also be swayed by new data released Friday showing that consumer confidence is rising and the economic slowdown at the beginning of the year wasn’t as bad as initially thought.

The nation’s total economic output — also known as gross domestic product — was revised to a 0.8% annual rate for the January-March period, the Commerce Department said Friday.

Though that was still weak growth, it marked an improvement over the initial estimate last month of 0.5%, which would have been the worst quarterly performance in two years.

Economists expect much stronger overall economic growth from April through June.

A closely watched model from the Federal Reserve Bank of New York forecasts that the economy is growing at a 2.9% annual rate in the second quarter. That would be the best performance in a year.

Consumers appear poised to spend more after being cautious in the first quarter as concerns about global growth triggered a steep downturn in financial markets.

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Retail sales increased in April at their fastest pace in nearly a year. And the University of Michigan said Friday that its consumer sentiment index, a leading barometer, rose substantially in May from the previous month.

“Consumers are satisfied that the volatility and stock market worries of the first part of the year are behind them,” said Chris G. Christopher, Jr., director of consumer economics at IHS Global Insight.

A strong economic rebound this spring would increase the likelihood that Fed policymakers would nudge up their key short-term interest rate when they meet in June.

They increased the benchmark federal funds rate by 0.25 percentage point in December after keeping it near zero for seven years in an attempt to boost the recovery.

At the time, central bank policymakers signaled they expected four similar increases in 2016, but that forecast was cut in half in March as the economy stumbled at the start of the year.

If Fed officials are going to raise the rate twice this year — and do so gradually — they need to act soon.

They indicated in the minutes of their April meeting that a 0.25 percentage point increase “likely would be appropriate” in June if the economic growth was improving in the second quarter, the labor market was continuing to strengthen and inflation was showing signs of increasing.

In recent days, central bank policymakers have publicly indicated another rate hike is nearing.

On Thursday, Fed Gov. Jerome Powell said that, “depending on the incoming data and the evolving risks, another rate increase may be appropriate fairly soon.”

James Bullard, president of the Federal Reserve Bank of St. Louis, told CNBC on Tuesday that it was time for the Fed to “pull the trigger” on another rate hike.

And Eric Rosengren, president of the Federal Reserve Bank of Boston, said in an interview with the Financial Times on Sunday that the U.S. economy was “on the verge” of meeting the conditions for a rate increase.

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UPDATES:

12:19 p.m.: This article has been updated with additional analysis and reaction.

This article was originally published at 11:39 a.m.