FOMC Minutes Confirm December Hike, 1.25% Rate Seen in 2016

The Federal Open Market Committee (FOMC) October minutes show there are clear signs and support for a December interest rate hike.

Yesterday, the FOMC October minutes were released. Minutes detail the continued back and forth of Fed officials on the rate hike decision, but with the majority of officials in favour of a lift off.

However, while some officials felt that rate hike conditions “could well be met by the time of the next meeting” and the Fed’s commitment to consider a rate hike “at is next meeting”, there was a dissenting voice that encourages opposing sentiment.

Notably, a few Fed officials lamented that the language being used would promote the anticipation of an imminent rate hike in December.

This resulted in Fed officials reverting to its more cautious tone, stating the final decisions on a rate hike would be made on the latest economic data available.

Taking the disappointing August and September job reports into consideration, some Fed officials felt the slowed job growth was “still above the rate consistent with stable or declining labour market slack”; some officials attributed to the slower pace to tightening in the labour market, as well as a sign of uncertainty.

Nonetheless, the case can be made that the latest economic data emanating of the US all point toward a rate hike, as the bench marks set by the Fed were met, and in some cases were surpassed.

The US October job report realised 271,000 new jobs, an unemployment rate of 5% and an increase in wages year-over-year.

For the majority, Fed officials concurred that while “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term, the “ US financial system appeared to have weathered the turbulence in global financial markets without any significant systemic stress.”

From the FOMC minutes: “While no decision had been made, it may well become appropriate to initiate the normalization process at the next meeting, provided that unanticipated shocks do not adversely affect the economic outlook and that incoming data support the expectation that labour market conditions will continue to improve and that inflation will return to the Committee's 2 percent objective over the medium term.”

Consensus on a Gradual Rate Increase

There was overwhelming consensus on one aspect: there would be a gradual trajectory of any future rate increases. That there should be more focus on the trajectory rather the timing of the first lift off.

The FOMC minutes state, “It was noted that the expected path of the federal funds rate, rather than the exact timing of the initial increase, was most important in influencing financial conditions and thus in affecting the outlook for the economy and inflation.”

Don’t Expect Interest Rates of Yesteryear... Just Yet

From since 2006, the Fed has had US interest rates near-zero. This was done to stymie the economic bleeding and encourage borrowing, in an effort to stimulate a severely weakened US economy.

Time and time again, and despite the market’s expectation of a rate lift off, the Fed has been reluctant to raise rates, fearing disruption of the economic recovery process.

Still playing it cautious, the FOMC minutes state, “The Committee reiterated its expectation that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

ABN AMRO: Fed Rate to Reach 1.25% in December 2016

Based on the FOMC meeting minutes, ABN AMRO are a one institution gearing up for a lift-off in December remains:

“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.”