FOMC Minutes Affirmed Rate Hike To Come 'Relatively Soon'

The FOMC minutes for the November meeting added little news to the post-meeting statement. Yet, it reinforced the conviction that a Fed funds rate hike would be coming in December. The members generally judged ongoing improvement in the economic outlook. As noted in the minutes, ‘almost all of them continued to judge that near-term risks to the economic outlook were roughly balanced’. On the monetary policy, the minutes indicated that ‘most participants’ judged that ‘it could well become appropriate to raise the target range for the federal funds rate relatively soon’.

The members appeared content with the progress of economic developments. Information since the September meeting led them to believe that ‘the labor market had continued to strengthen’ while ‘growth of economic activity had picked up from the modest pace seen in the first half of this year’. On the employment market, policymakers acknowledged ‘solid’ job gains, although the unemployment rate was ‘little changed in recent months’. They also noted that ‘household spending’ had risen ‘moderately’ while ‘business fixed investment’ had remained soft. There were more discussions on the participation rate of the labor market in November. Regarding the rise of the participation rate since late 2015, ‘a few’ members believed it had been driven by ‘a diminution in the flow of individuals leaving the workforce rather than an increase of new entrants into the labor force’ and had been ‘more prevalent among workers with relatively less education’. The members were uncertain about how long the rate would continue rising. This was in contrast to previous comments that the rise in participation rate was due to new entrants coming into the labor market.

Meanwhile, inflation had ‘increased somewhat since earlier this year but was still below’ the +2% target. There were opinions suggesting that ‘allowing the unemployment rate to modestly undershoot its longer-run normal level could foster the return of inflation to the FOMC’s +2% objective over the medium term’. However, a ‘few’ members ‘were concerned that a sizable undershooting of the longer-run normal unemployment rate could necessitate a steep subsequent rise in policy rates’.

The market had priced in almost 100% of rate hike next month. Indeed, the November minutes indicated a rate hike would come very soon. As mentioned in minutes, ‘most participants expressed a view that it could well become appropriate to raise the target range for the federal funds rate relatively soon, so long as incoming data provided some further evidence of continued progress toward the Committee’s objectives’. While ‘some members’ suggested that a rate hike should occur at the next meeting so as to ‘preserve credibility’ of the central bank, a ‘few’ (the doves) emphasized a ‘cautious approach’. The minutes do not alter our, and the market’s, view that the Fed would increase the policy rate in the December meeting.

FOMC Minutes Affirmed Rate Hike To Come 'Relatively Soon'