CME CME Group Inc

Federal Reserve officials are looking more confidently toward an interest-rate increase before the end of the year, possibly as soon as September, as financial markets have stabilized after Britain's vote to leave the European Union and the economy shows signs of picking up.

Policy makers at the central bank are almost certain to leave rates unchanged when they meet July 26-27, according to their public comments and interviews with officials.

But the message in their postmeeting policy statement could be that the economy is on a more solid footing than it seemed to be when officials last gathered in June, setting the stage for raising interest rates if economic data hold up in the months ahead.

Such a message would get the attention of futures markets, which view the chances of the Fed making a move by September as low. In early June, traders on the Chicago Mercantile Exchange put a probability of greater than 60% on the bank raising short-term rates by at least a quarter percentage point as soon as September, according to the CME. But that chance dropped sharply after a weak May jobs report and the June 23 Brexit vote, standing at just 12% on Monday before rising to 18% on Tuesday.

Stock markets initially fell but later bounced back after the Brexit vote, with U.S. indexes hitting record highs and the dollar stabilizing. Moreover, the June jobs report was better than expected, putting a September move by the Fed back on the table.

Many officials have said they can be patient before raising rates again, meaning a July move is highly unlikely. But new rounds of strong economic data—particularly on hiring or an uptick in inflation—could increase their sense of urgency in the months after their meeting next week.

Atlanta Fed President Dennis Lockhart, a centrist at the central bank whose views often represent a middle ground among officials, told reporters last week it remains likely the Fed will raise rates this year, adding, "I wouldn't rule out as many as two" increases.

Markets had been "quite orderly" since the Brexit vote, he said, and turbulence leading up to and right after the British vote "does not seem to have caused direct harm to the country's economy."

"We should be looking toward removing accommodation," Robert Kaplan, president of the Federal Reserve Bank of Dallas, said in an interview last week at the Official Monetary and Financial Institutions Forum. "We just should do it in a patient, gradual way."

The Fed raised its benchmark federal-funds rate last December to a range between 0.25% and 0.5% and has held it steady since then—despite warnings it would raise rates again—amid bouts of uncertainty about the global economic outlook and turbulence in the financial markets.

Officials will be reluctant in their policy statement next week to signal when the next rate increase is coming. They still face uncertainty about the economic outlook. Moreover, an eight-week stretch will pass between their July meeting and the Sept. 20-21 gathering, during which two more jobs reports and a slew of other data will be released.

Fed officials tried to nudge market expectations for a rate move earlier this year, with embarrassing results. Minutes of their April policy meeting, as well as comments by officials in April and May, suggested a rate move in June or July was on track. Then the weak May jobs report and Brexit vote put the Fed on hold, and expectations for a July rate increase tumbled.

Officials could signal a more upbeat assessment of the economy after they meet next week, while keeping their options open on rates.

At their June gathering, they said the pace of labor- market improvement had slowed and job gains had diminished. Since then, the Labor Department has reported employers added a healthy 287,000 jobs in June. One way to signal more optimism would be to upgrade their assessment of the job market.

"We're basically at full employment," Loretta Mester, president of the Cleveland Fed, said in a recent interview with The Wall Street Journal. She added, "I think the underlying fundamentals remain very solid for the U.S. economy."

Jobs will be a wild card for the Fed over the next two months. Monthly payroll growth averaged 147,000 in April through June, a slowdown from monthly growth of over 196,000 in the first quarter and 229,000 in 2015.

If payrolls stay on a slower track, officials could decide to delay a rate move until year-end or even next year, but a shift back to monthly payroll gains near 200,000 could lead them to move by September.

Meantime, Fed Chairwoman Janet Yellen could face divisions as a decision about rates approaches. Though officials like Ms. Mester have expressed support for raising rates, others are urging the Fed chief to proceed with extreme caution.

" This is not an economy that's running hot. This is not the late '70s," Fed governor Daniel Tarullo said in an interview with The Wall Street Journal earlier this month. "I have thought that it was the better course to wait to see more convincing evidence that inflation is moving towards and would remain around the 2% target" before raising rates again.

Write to Jon Hilsenrath at jon.hilsenrath@wsj.com and Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

July 20, 2016 01:35 ET (05:35 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.