FOMC Minutes: Not Such A Close Call After All

The following is SEB's reaction to today's FOMC minutes from the September meeting.

While the “no hike” decision was a close call according to Chair Yellen three weeks ago, that was not exactly reflected in the minutes according to which all but one member said that economic conditions didn’t warrant a hike in September. Many members saw liftoff conditions met this year, however. But we already knew that since 13 out of the 17 officials forecast a hike in 2015 according to the latest set of projections. According to the Fed, labor market conditions are now good enough for interest rate hikes and as such in that respect the Fed’s job is largely done. According to the minutes, the improvement in labor market conditions met or would soon meet one of the committee’s criteria for beginning policy normalization.

Instead the reason for not hiking rates in September were the growing risks to economic growth and inflation from abroad. Although officials at the same time agreed that the developments over the inter-meeting period had not materially altered the economic outlook, the committee decided that it was prudent to wait for additional information confirming that the economic outlook had not deteriorated.

The inflation outlook is key; confidence that inflation would gradually return to the 2 percent objective has not increased due to the global and financial developments. More recently, however, market turmoil has substantially eased and the S&P 500 is back to where it was at the September meeting. So shouldn’t confidence that inflation will stage a comeback be rising accordingly too? The inflation story obviously is a little bit more complicated than that, however. Several members also saw a risk that the additional downward pressure on inflation from lower oil prices and a stronger dollar could persist and, as a result, delay or diminish the expected upturn in inflation. A couple of members also expressed unease with the decline in market-based measures of inflation compensation over the inter-meeting period. We have also were on the receiving end of a weak employment report that made an October hike very unlikely according to the future market. A December liftoff is obviously facing headwinds too, but it nevertheless remains our forecast.

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