FOMC Minutes September 17-18 Meeting Preview: Balancing the odds

• September FOMC enacted the second 0.25% cut since 2008
• Fed economic logic remains focused on foreign and global threats to US growth
• Markets anticipate a third cut this month from a divided FOMC

The Federal Reserve will release the edited minutes of the September 17-18 Federal Open Market committee (FOMC) meeting on Wednesday October 9 at 18:00 GMT, 14:00 EDT

Federal Reserve Policy

Two rate cuts since July have given Fed rate policy a firm downward bias.  Yet Chairman Powell and the governors have been reluctant to commit to the type of counter cyclical view that in the past would have reduced rates by much of the available margin. They have continued to see these cuts as a passing necessity brought on by the questionable global economic outlook and specific external threats to the US expansion.

The board has been unusually divided for two meeting. Eric Rosengren of Boston and Esther George of Kansas City voted to leave rates unchanged and James Bullard of St. Louis supported a 50 basis point cut in July and September.

Rate projections of the board members, voting and non-voting, in the so-called dot plot portray the division. In September five governors thought the Fed had done too much, seven that it had done too little and five think the response had been correct.

Fed officials have said numerous times that the central bank’s goal is to maintain the current expansion and let the economy continue to deliver the benefits of full employment to US workers.

US economic data

In the three weeks since the September meeting US data has been mixed. Business sentiment dropped sharply in September with the manufacturing purchasing manager’s index (PMI) staying below 50 and in contraction for the second month while the services analog fell more than expected but stayed in expansion.  Executives in both sectors cited the almost two year old trade war with China as the largest factor in their considerations.

Reuters

Payrolls performed well in September when 136,000 new positions, slightly below forecast, were bolstered by an additional 45,000 in revisions to July in August.

FXStreet

The unemployment rate fell to 3.5% a five decade record and the rates for Hispanics and African–Americans held at historical lows.  Annual wage gains declined to 2.9% which was the first month below 3.0% in over a year.

Inflation remained tame with the personal consumption price index, the Fed’s chosen measure, registering 1.8% year over year in September and the core PCE index at 1.4%.  The widening gap between rising wage and falling inflation has given consumers a fillip in disposable income.

Retail sales over the last six month have grown at the fastest pace in 16 years. Though consumer sentiment dropped last month to the lowest level in the last two years it remains stronger than at any point of the last decade prior to the 2016 election.

Reuters

Fed Futures

Market confidence in a third rate cut at the October 29-30 FOMC meeting has declined from a high of 94.6% on October 3 to 79.6% as of this writing.  The drop was largely the result of the relatively strong NFP report on October 4.  

CME Group

FOMC minutes and Fed policy

The international disputes that prompted the two Fed cuts, the US China trade war and the British exit from the European Union are as lively and dangerous as they were in September.

The US economy has slowed substantially from its 3.1% expansion in the first quarter and has been running at about 2.0% for six months.  Job creation has fallen by almost 100,000 per month since January though it remains above new entry level.  The decline of business sentiment and investment especially in manufacturing, a traditional leading indicator, may have earned the attention of the central bankers.

The intersection of these two poles of Fed analysis and the global concerns voiced by the governors will be the crux of the market reaction.  The more worried and expressive the governors are in the minutes the higher will the odds for an October rate cut rise.  

Market reaction will likely be stronger in the equities to any interpretation that favors lower rates with currencies and credit having mostly factored in an October cut.