October FOMC Minutes to Reveal Insiders View on U.S. Rates

Employment, Retail Sales and Inflation Hurdles Cleared Ahead of December Rate Decision

The USD appreciated against major pairs after the statement from the October Federal Open Market Committee (FOMC) was published on October 28. After two uneventful FOMC meetings in June and September there was little expected in October but the Federal Reserve was able to put the December meeting back on the table by issuing a hawkish statement. A positive view on the pace of growth of the U.S. economy, reducing the attention to international developments and mentioning the next meeting as a possibility of a rate change. The actual statement changed less than 6% of the wording from September but it did introduce the key phrase:

In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress “both realized and expected” toward its objectives of maximum employment and 2 percent inflation.

FOMC member comments have supported a rate hike sooner rather than later, but for the most part they haven’t committed to a clear date. Chair Janet Yellen said the week of the statement when addressing congress that the December rate hike was a “real possibility”;. The market has responded by restarting the USD rally that had stalled after the September FOMC brought no change to the U.S. benchmark interest rate hike. The CME FedWatch Tool is a gauge of the markets expectation based on the price of future fed fund rate prices and is now above 70% of a rate hike in December.

The path to the December rate hike has been mostly clear as ever since former Chair Ben Bernanke announced the start of the Fed’s tapering program the market has been expecting a rate hike, which is what triggered the taper tantrum at the time. The Fed has complicated the timing of the rate hike by focusing more on the actual schedule rather than the size or speed of the tightening of monetary policy. With the use of “data dependency”; they have narrowly focused on when the rate hike will happen, and not left much thought on what happens after the first announcement.

The Federal Reserve has talked itself into a corner as macro conditions have deteriorated even as the U.S. economic recovery appears to be back on track. The latest non farm payroll came in well above expectations, crushing forecasts at 271,000 new jobs added in September. Retail sales continue their tepid growth, but are still in positive territory at 0.1 percent. Inflation was the latest hurdle and this weeks it posted a 0.2 percent growth which is the first time the CPI increases in three months. Core inflation is 1.9 percent year over year and inline with Fed expectations of 2 percent.

Forex market events to watch this week:

Wednesday, November 18
8:30 am USD Building Permits
2:00 pm USD FOMC Meeting Minutes
Tentative JPY Monetary Policy Statement
Thursday, November 19
Tentative JPY BOJ Press Conference
4:30 am GBP Retail Sales m/m
8:30 am USD Unemployment Claims
10:00 am USD Philly Fed Manufacturing Index
Friday, November 20
3:00 am EUR ECB President Draghi Speaks
8:30 am CAD Core CPI m/m
8:30 am CAD Core Retail Sales m/m

*All times EST