Today’s focus is on the September FOMC minutes. They should shed light on the Fed’s thinking in regards to domestic and international risks.
We expect to read that the committee decided to delay firming policy due largely to global financial turbulence – notably China. The minutes are likely to show the tighter financial market conditions that resulted from the EM shocks (stronger dollar, wider credit spreads and equity market declines) was key in driving the Fed’s decision to remain on hold. These shocks, in turn, could hamper the Fed’s ability to hit its medium-term inflation target.
But the minutes are also likely to show that the Fed’s upbeat view of the labour market persists. In this regard, we think the Fed will emphasise the strength of the labour market, which continues to remain their favoured forecasting tool for inflation.
In the end, we doubt the minutes will sound an all clear on a December rate hike.
Even so, it is likely the minutes will show the Fed was much closer to a rate hike than many believe, helping to stabilize the recent sell-off in the greenback.
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