FOMC Minutes Still Show Fed Divided on Rate Hike

October FOMC Meeting Minutes Still Show Members Are Divided But Risks of Hike Delay Make a Stronger Argument than Waiting for the Perfect Conditions.

After the release of the October Federal Open Market Committee (FOMC) statement on October 28 the case for an interest rate hike has been growing after the setback of the September FOMC. Not having a press conference the market was going to keep the focus on the statement and the Fed capitalized on the opportunity by adding the “next minute” language that put the rate hike back on table.

The minutes from the October FOMC were released with similar anticipation for investors and analysts to scan them for clues on the Federal Reserve’s next move.

The minutes show Fed members continue to debate back and forth on the right call to make for the U.S. economy. The notes some members are still wary of hiking too soon and stifling the momentum of the economy. The flip side of that argument is made by members who believe the Fed could further miscommunicate its intentions to the market and take a bigger credibility hit that could jeopardize monetary policy going forward. The risks of keeping the rate unchanged are outweighing the potential damage done by hiking sooner rather than later but the fact that there is still internal debate reduces the probability of a rate hike in December.

The EUR/USD is trading higher with the USD retreating as the market was expecting less debate on the timing given the hawkish signal sent by the October FOMC statement. Fed members comments during the two weeks between eh statement and the release of the minutes had increased forecasts of a rate hike in December with futures markets pointing to a 68 probability of a higher fed funds rate.
Employment, Retail Sales and Inflation Hurdles Cleared Ahead of December Rate Decision

The USD appreciated against major pairs after the statement from the October Federal Open Market Committee (FOMC) was published on October 28. After two uneventful FOMC meetings in June and September there was little expected in October but the Federal Reserve was able to put the December meeting back on the table by issuing a hawkish statement. A positive view on the pace of growth of the U.S. economy, reducing the attention to international developments and mentioning the next meeting as a possibility of a rate change. The actual statement changed less than 6% of the wording from September but it did introduce the key phrase:

In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress “both realized and expected” toward its objectives of maximum employment and 2 percent inflation.

FOMC member comments have supported a rate hike sooner rather than later, but for the most part they haven’t committed to a clear date. Chair Janet Yellen said the week of the statement when addressing congress that the December rate hike was a “real possibility”. The market has responded by restarting the USD rally that had stalled after the September FOMC brought no change to the U.S. benchmark interest rate hike. The CME FedWatch Tool is a gauge of the markets expectation based on the price of future fed fund rate prices and is now close to 70% of a rate hike in December.

The path to the December rate hike has been mostly clear as ever since former Chair Ben Bernanke announced the start of the Fed’s tapering program the market has been expecting a rate hike, which is what triggered the taper tantrum at the time. The Fed has complicated the timing of the rate hike by focusing more on the actual schedule rather than the size or speed of the tightening of monetary policy. With the use of “data dependency”; they have narrowly focused on when the rate hike will happen, and not left much thought on what happens after the first announcement.

The Federal Reserve has talked itself into a corner as macro conditions have deteriorated even as the U.S. economic recovery appears to be back on track. The latest non farm payroll came in well above expectations, crushing forecasts at 271,000 new jobs added in September. Retail sales continue their tepid growth, but are still in positive territory at 0.1 percent. Inflation was the latest hurdle and this weeks it posted a 0.2 percent growth which is the first time the CPI increases in three months. Core inflation is 1.9 percent year over year and inline with Fed expectations of 2 percent.

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza