This article, originally published at 2:26 p.m. on Friday, May 27, 2016, has been updated with comment from Fed officials, bank executives and analysts.
An interest rate increase really, truly may be coming sooner than you think.
Federal Reserve Chair Janet Yellen joined a growing chorus of her central bank colleagues Friday in indicating that it might be "appropriate" to boost rates in the near future, a sentiment that raised the market's odds of a hike in June to 32%. That's a climb of 4 percentage points from Thursday, and it's more than three times as high as the odds earlier this month.
"Growth looks to be picking up from the various data that we monitor," Yellen said during a presentation at Harvard University's Radcliffe Institute for Advanced Study. "If that continues and if the labor market continues to improve -- and I expect those things will occur," she said, then it would be responsible "for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months, such a move would be appropriate."
Unlike some of her colleagues, and the minutes of the monetary policy committee's April meeting, Yellen didn't mention June specifically, so Bank of America's (BAC) - Get Report forecast of a September increase remains consistent with her statements, said Michelle Meyer, the firm's U.S. economist.
Still, "we can't dismiss the possibility that she goes sooner," Meyer said in a telephone interview. "Given the recent messaging from the Fed, there's a risk that they go at some point in the summer. It's a fairly close call between July and September, at this point."
A more rapid rate increase would be welcome news for U.S. banks from JPMorgan Chase (JPM) - Get Report and Wells Fargo (WFC) - Get Report to Citigroup (C) - Get Report , which grappled with seven years of near-zero rates as the Fed attempted to buoy the economy in the wake of the financial crisis. The central bank indicated in December, after a 25-basis-point hike ended the "zero bound" period that started in 2008, that it might raise rates as many as four times this year.
The Fed then cut the forecast by half amid financial market volatility in January and February, linked to slowing growth in China and plummeting oil prices. Crude's precipitous drop to around $26 a barrel from a peak above $107 in 2014 increased the likelihood that energy companies would default on loans and spurred concern about the safety of banks, even though the energy-loan market is a fraction of the size of the $15 trillion mortgage market at the heart of the 2008 financial crisis.
Short-term interest rates today, at 0.25% to 0.5%, look "very different from what we would have imagined a couple of years ago," Wells Fargo CFO John Shrewsberry told investors this week at a company summit held every two years.
Nonetheless, the San Francisco-based bank expects to be able to boost net interest income, the difference between what it charges to lend money and what it pays to depositors, even if there's no increase in interest rates this year at all. The revenue stream already rose 6.4% over the past two years, even as the net interest margin, which compares interest income to total assets, narrowed 45 basis points.
Banks typically are able to widen the margin by passing rate increases on to borrowers more quickly than depositors, and the dearth of hikes since 2008 is one of the many ways that the latest recovery from a recession varies from its historical predecessors.
"It's the recovery people use the word 'but' to help describe," CEO John Stumpf told Wells Fargo stockholders. That's reflected to a degree in banks' share prices: The KBW Bank Index has fallen 2.8% this year, compared with gains on the broader S&P 500 and the Dow Jones Industrial Average.
"We've had 73 months of job growth, we've created over 13 million new private-sector jobs and the unemployment rate is down to 5%, but wages aren't growing, and it doesn't feel that good," Stumpf said. "Housing has recovered; in some places, recovered fully, back to what it was prior to the recession, but it's not better for everyone everywhere. If you look at the percentage of ownership of housing, it's coming down every month."
The sluggishness illustrates the challenges facing the central bank and indicates an "imminent hike would be a mistake," Morgan Stanley economist Ellen Zentner said in a note to clients on Friday. She predicts the Fed will raise rates just once this year, in December.
"We've had one soft jobs report," Zentner said, referring to April employment growth that trailed the 12-month average by 31%, "and would like to see what the next one holds." She also noted softening corporate profits, with five straight drops in quarterly earnings by S&P 500 companies.
"Declining profits tend to lead to declines in investment and hiring," Zentner said.
Among the indicators that might support a rate hike, on the other hand, are loosening consumer credit, unemployment at half of its 2009 peak, and an increased estimate of the U.S. economy's growth in the first three months of the year. The Commerce Department said Friday that gross domestic product grew at a 0.8% annual rate in the first quarter, rather than the 0.5% pace estimated previously.
Household debt, meanwhile, widened 1.1% from the end of last year, to $12.25 trillion, according to a report from the New York Federal Reserve Bank this week. Still, it remains below its peak in the third quarter of 2008, and mortgage and car-loan originations have both dropped.
"Recent spending data have been less positive than the labor market data," Federal Reserve Governor Jerome Powell, a voting member of the monetary policy committee, said in a Thursday speech. "Growth of personal consumption slowed noticeably in the first quarter. Business' fixed investment has fallen for two consecutive quarters, mainly because of a steep decline in energy-related capital expenditures."
Nonetheless, if data continue to show that economic growth is increasing toward the Fed's 2% goal and the labor market is improving, "I would see it as appropriate to continue to gradually raise the federal funds rate," he said. "Depending on the incoming data and the evolving risks, another rate increase may be appropriate fairly soon."