September FOMC minutes: clearing the decks for a hike in December

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Here is how we read the minutes of the policy-setting meeting of the US Federal Open Markets Committee (FOMC) held on 19-20/09/2017:

  • The September FOMC minutes reveal a continuing debate within the Federal Reserve on the risks to its central forecast for inflation to rise gradually over the medium term. Overall, conviction in this forecast appears to have eroded further, but just on the margins.
  • At the July FOMC meeting, many participants had noted that ‘much’ of the recent decline in inflation had been due to transitory or one-off factors; by September, participants only ascribed ‘at least part’ of the softness to such factors.
  • In addition, the FOMC minutes showed, participants highlighted secular factors that could be suppressing inflation and whose impact might be intensifying. These include “the influence of technological innovations on competition and business pricing”.
  • In the FOMC minutes, participants acknowledged that at least one idiosyncratic factor was weighing on the rate of inflation, namely changes to US government healthcare programmes that mute healthcare costs may persist for quite some time.
  • Still, even as some participants emphasised the need to assess the likelihood that “inflation was again on a trajectory” to the 2% target as part of any decision on a further rate increase, we believe there is a relatively low hurdle to a December rate rise.
  • An increasingly tight US labour market, more recent signs of rising wages, above-trend GDP growth and easy financial conditions should leave most voters on the FOMC relatively confident in the medium-term inflation outlook.
  • As such, assuming no government shutdown ahead of the next FOMC meeting in December, we continue to assign 80% odds to a rate increase then. Our expectations are in line with those of the market which assigns a 76% probability to a 25bp rise in the Fed’s main interest rate at the FOMC meeting on 13/12/2017 (see Exhibit 1).

Exhibit 1: Probability (%) assigned by the market to an interest-rate rise at the meeting of the FOMC on 13/12/2017

minutesSource: Bloomberg based on pricing of federal fund futures contracts, BNP Paribas Asset Management, as of 12/10/2017

Written on 12/10/2017

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