Fed: Heading for a December hike - Rabobank

Philip Marey, Senior US Strategist at Rabobank, notes that the minutes of the FOMC meeting of November 1-2 did not add much new information.

Key Quotes

“After all, less than a week ago Chair Janet Yellen presented the Fed’s views on the economy and monetary policy to the Joint Economic Committee of the US Congress. While the FOMC meeting took place before the elections, Yellen visited Congress a week after the election outcome.”

“The minutes confirm the widely held view that the Fed will hike in December. Note that futures are pricing in a 100% probability. Members generally agreed that the case for a hike had continued to strengthen. But a majority of members judged that the Committee should, for the time being, await further evidence of progress toward the Fed’s objectives. Most participants expressed a view that it could well become appropriate to raise the target range for the federal funds rate relatively soon. Some participants noted that recent Committee communications were consistent with a hike in the near term or argued that to preserve credibility, such an increase should occur at the next meeting.”

“Many participants judged that risks to economic and financial stability could increase over time if the labor market overheated appreciably, or expressed concern that an extended period of low interest rates risked intensifying incentives for investors to reach for yield, potentially leading to a mispricing of risk and misallocation of capital. In contrast, some others judged that allowing the unemployment rate to fall below its longer-run normal level for a time could result in favorable supply-side effects or help hasten the return of inflation to the Fed’s 2% objective; noted that proximity of the federal funds rate to the effective lower bound places potential constraints on monetary policy; or stressed that global developments could pose risks to US economic activity.”

“A few participants advocated an increase at this meeting. (Note that Esther George and Loretta Mester formally dissented from the decision to keep the fed funds target range unchanged in November).”