The October FOMC minutes show that policy makers are on track to hike rates soon. Debates within the Committee over the cause of weak wages and the risks to the inflation outlook will not delay lift-off; only deterioration in the data or financial conditions could do that at this point.
There is scant evidence in the minutes of the October FOMC meeting that the Federal Reserve officials are reluctant to begin raising rates. However, there is also no sign of a hawkish shift in tone since the last set of minutes. Policy makers’ assessment of the economic outlook appears to be relatively stable. As long as nothing happens to change Federal Reserve officials’ views, the passage of time is all that is needed for rate hikes to begin.
Policy makers expressed confidence that the effects of this summer’s China-driven financial shock are abating. Private domestic demand growth is seen as expanding at a solid pace, sufficient to suggest moderate growth and further declines in slack capacity.
“Some” participants were concerned that the recent hiring slowdown would prove not to be temporary, but “most” think downside risks due to the summer financial shock have diminished. In the stock vocabulary of Fed communication, “most” tops “some.”
The FOMC minutes record debate over the implications of tame wage gains. One side of the debate sees soft wage gains as a response to weak productivity growth. The other side sees the subdued wage trend as evidence that the current level of resource use is not sufficient to generate inflationary pressure.
Concern was expressed that delay in raising rates could increase uncertainty in the market and magnify the importance of the timing of the first rate hike. However, policy makers want to avoid the impression that the timing of the first hike is more important than the shape of the rate path.
The impact of the Paris terror attacks might have been expected to lead to growth worries and increase the chance of more monetary easing. However, we find that the economic and financial aftermath of terrorist attacks tends to be short-lived, with no monetary policy response typically needed.
That said, the outcome of the September FOMC meeting demonstrated that the Fed is more focused on overseas growth risks than terrorist attacks abroad. And, barring serious financial-market disruptions, the Fed’s rate-hiking timetable will probably not be altered by geopolitical shocks emanating from Syria.
For our part, we still expect the Fed to begin raising rates at the March 2016 FOMC meeting, instead of the December meeting.
By Roubini Views on Critical Issues