FOMC minutes don’t change the odds of a December hike – RBC Economics

Josh Nye, Economist at RBC Economics, notes that the minutes of the November FOMC meeting don’t add much to the policy statement, which itself was little changed relative to September. 

Key Quotes

“The case for a rate hike was seen as having continued to strengthen (as the statement indicated) and some participants argued that an increase should be made at the upcoming meeting in order to preserve the Fed’s credibility.  Otherwise there was little to suggest that participants were predisposed to raise rates in December, with the Committee wanting to see further progress toward its objectives before continuing to tighten.”

“The recent data flow seems to have met that bar, with a solid payroll report, further indications that growth picked up in the second half of the year, and increases in both spot inflation and market-based inflation expectations.  Those developments, as well as potential changes in fiscal policy that could force the Fed to tighten more rapidly than previously expected, have led markets to fully price in a December rate hike.” 

“Our Take:

The November minutes are more dated than usual and should do little to alter market expectations that the Fed will raise rates in December.  With a hike at the upcoming meeting seeming a foregone conclusion, focus has shifted to 2017 and whether potentially-inflationary fiscal stimulus will force the Fed to raise rates faster than the gradual pace that has prevailed.  However, until further details on the fiscal backdrop (and other risks that cloud the outlook, including potentially disruptive trade restrictions) are available, we expect the Fed will stick with its base case that accommodation will be removed slowly and rates are likely to remain below longer run neutral levels for some time.  That said, it will be interesting to see the extent to which the Fed discusses upside risks to their projections for the appropriate fed funds rate when they meet in December.”