- October’s FOMC minutes point to a December rate hike…
- …and gradual pace of rate hikes thereafter
- Minutes suggest US weathered well global financial stress…
- …and US domestic demand to support growth going forward
Strong language in FOMC minutes point to December rate hike
The FOMC minutes of the 27-28 October meeting, confirmed that December is a “live possibility” for a rate hike. Indeed, the number of participants favouring a rate hike as soon as December, seems to be in a majority. The minutes indicate that ‘most participants anticipated that based on their assessment of the current economic situation and their outlook for economic activity, the labour market and inflation, conditions for normalisation will be met in the next meeting’. Moreover, some participants thought that the conditions for beginning the policy normalisation process had already been met. Although Mr. Lacker, was the only participant that dissented in the last meeting, arguing that conditions were already right for a rate hike, it seems that other member(s) shared his position then. There are some members, however, that see it unlikely that the information that would be available until December would warrant raising the target rate at that meeting. This suggests that there will be possible dissenters in the December meeting arguing for a delay.
US weathered well global financial stress; more optimistic on US economy
The minutes mention that at the time of the meeting concerns about financial developments had lessened and that the US appeared to have weathered well the turbulence in global financial markets. Nonetheless, a few participants continued to see appreciable down-side risks to the global economy. The minutes showed that FOMC members were positive about the strength of US private domestic demand, which they anticipated would support economic growth going forward, despite the slowdown in foreign demand.
Gradual pace of rate hikes after lift-off
Participants continue to insist that the pace of tightening is more important than the timing for financial conditions and thus for the economic outlook and inflation. If the normalisation takes place soon, or as we expect in December, participants suggested that it ‘should be shallow’.
Dovish members, in minority, will likely stick to the position
The more dovish members seem to have multiple concerns. Several participants mentioned that despite the lessening concerns about the global economy, they still saw appreciable down side risks. They were also concerned about a potential loss of momentum in the economy and the associated possibility that inflation might fail to increase as expected. They also questioned whether the economy was strong enough to tackle potential adverse shocks given that the Federal funds rate is near zero.
More recent comments from Fed officials
On Wednesday, a few Fed officials speaking at a Clearing House Annual Conference reinforced the case of raising rates, but stopped short of committing for lift- off according to press reports. New York Fed President Dudley, for instance, mentioned that it was ‘a good thing to raise rates, since this is a sign that the economy is actually returning to health and the Fed is closer to achieving its dual mandate objective’. Meanwhile Mr. Lockhart, a voting member, said that he ‘feels comfortable with moving off zero soon, conditioned to no marked deterioration of economic conditions’.
We think that after the lift-off in December, the pace for rate hikes will be slow. Indeed, the divergence in policies across central banks and financial tightening in the US requires a cautious approach to ensure that the actions do not result in unnecessary tensions. We expect the Fed policy rate to reach 0.5% in December 2015. Then the next hike will be in June, giving the Fed a bit more time to assess the impact for the US economy and thereafter hikes every other meeting reaching 1.25% at year-end 2016.