Fed Minutes Point To Rate Rise … Sometime…

The last FED meeting suggests it could well be time to raise short-term interest rates at the December policy meeting after keeping them at near zero levels for more than seven years, according to released minutes.  Whilst they voted to change the wording of their policy statement leaving the option to lift in December; it is not a sure bet.

From the Fed minutes for October.

After assessing the outlook for economic activity, the labor market, and inflation and weighing the uncertainties associated with the outlook, all but one member agreed to leave the target range for the federal funds rate unchanged at this meeting. Members generally agreed that, in light of some weaker-than-expected readings on measures of labor market conditions and in the absence of greater confidence about the inflation outlook, it would be prudent to wait for additional information bearing on the medium-term outlook before initiating the process of policy normalization. One member, however, preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.

In its postmeeting statement, rather than framing its near-term policy path in terms of how long to maintain the current target range, the Committee decided to indicate that, in determining whether it would be appropriate to raise the target range at its next meeting, it would assess both realized and expected progress toward its objectives of maximum employment and 2 percent inflation. Members emphasized that this change was intended to convey the sense that, 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 labor market conditions will continue to improve and that inflation will return to the Committee’s 2 percent objective over the medium term. Members saw the updated language as leaving policy options open for the next meeting. However, a couple of members expressed concern that this wording change could be misinterpreted as signaling too strongly the expectation that the target range for the federal funds rate would be increased at the Committee’s next meeting. While members differed in their assessment of the likelihood that incoming information will warrant an increase in the target range for the federal funds rate when the Committee meets in December, they agreed that, in making the decision, the Committee will evaluate progress toward its objectives, taking into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. 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. 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.

The Committee also maintained its policy of reinvesting principal payments from its agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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