FOMC Minutes Confirm Rate Hike Imminent "To Preserve Credibility"

A lot has changed since the November 2nd FOMC statement - most notably the world has suddently become awesome again.

The relatively benign statement (and election result) has left rate-hike odds at 100% for December but comment from Fischer and Yellen since have hinted concerns at the need for Trump fiscal spendfest. The main risk going in to the minutes was a dovish tilt for the future, tamping the current 'nothing can stop us now' attitude (and we note the dollar leaked lower into the release).

But sure enough, The Fed confirmed a rate-hike was approrpoate "relatively soon" and was "important to Fed credibility."

  • *MOST FED OFFICIALS SAW RATE HIKE APPROPRIATE `RELATIVELY SOON'
  • *MANY FED OFFICIALS SAW STABILITY RISKS IF JOB MKT OVERHEATED
  • *SUBSTANTIAL MAJORITY FED OFFICIALS SAW RISKS ROUGHLY BALANCED
  • *SOME OFFICIALS SAW DEC. HIKE IMPORTANT TO FED CREDIBILITY
  • *FED OFFICIALS SEE RESERVE BALANCES STAYING LARGE FOR `A WHILE'

The biggest split in the November meeting minutes was between those who wanted a rate hike “relatively soon” if incoming data continued to show an improving economy, with some explicitly calling for a move in December, and yet another pushing for a hike as soon as last month. 

Some officials argued that “an increase should occur at the next meeting,” according to minutes of their Nov. 1-2 meeting, released Wednesday following the usual three-week lag. That indicated the Fed was leaning toward raising rates at its Dec. 13-14 gathering barring an upset to the economy. However, “Most participants expressed a view that it could well become appropriate to raise the target range for the federal funds rate relatively soon." (key excrepts below).

Since the Nov FOMC statement, gold and bonds have been crushed as oil and stocks soared:

 

Heading into the minutes, the market has zero expectations of a surprise in December:

 

And looking further out at Fed funds, a 28% chance of a March hike is priced in and that rises to 61% by June and an 88% chance of at least one hike in 2017.

 

These were the key excerpts:

Some Fed participants were worried that the economic expansion was at risk without rate hikes, and the Fed would be behind the curve on unemployment:

A few members were concerned that a sizable undershooting of the longer-run normal unemployment rate could necessitate a steep subsequent rise in policy rates, undermining the Committee’s prior communications about its expectations for a gradually rising policy rate or even posing risks to the economic expansion.

As a result, some Fed participants said that to "preserve credibility" a rate hike should occur at the next meeting:

Some participants noted that recent Committee communications were consistent with an increase in the target range for the federal funds rate in the near term or argued that to preserve credibility, such an increase hould occur at the next meeting.

Others were even more aggressive, and wanted a rate hike as soon as November:

A few participants advocated an increase at this meeting; they viewed recent economic developments as indicating that labor market conditions were at or close to those consistent with maximum employment and expected that recent progress toward the Committee’s inflation objective would continue, even with further gradual steps to remove monetary policy accommodation.

But most said it is best to wait for further evidence of inflation:

But a majority of members judged that the Committee should, for the time being, await some further evidence of progress toward its objectives of maximum employment and 2 percent inflation before increasing the target range for the federal funds rate. A few members emphasized that a cautious approach to removing accommodation was warranted given the proximity of policy rates to the effective lower bound, as the Committee had more scope to increase policy rates, if necessary, than to reduce them. Two members preferred to raise the target range for the federal funds rate by 25 basis points at  this meeting.

FOMC on the recent LIBOR suge:

Money market reform continued to affect several short-term funding markets in the weeks leading up to the October 14, 2016, compliance deadline, as investors continued to shift from prime funds to  government funds. However, these flows slowed significantly in the days just before October 14 and remained subdued afterward. Measures of the liquidity of institutional prime funds, which had increased substantially ahead of the compliance deadline, subsequently declined. The rise in total assets of government funds over the intermeeting period appeared to contribute to moderately elevated take-up at the System’s ON RRP facility. Overnight Eurodollar deposit volumes fell substantially in the weeks preceding the MMF reform compliance deadline and remained low as prime funds pulled back from lending in this market. Despite these volume changes, there was little effect on overnight money market rates, although the spread between the three-month London interbank offered rate and the overnight index swap rate remained elevated.

And on what really matters: asset prices, and the fact that as the Fed points out, foreign central bank announcements had limited impact:

Monetary policy announcements by foreign central banks had limited effects on asset prices. At its September monetary policy meeting, the Bank of Japan (BOJ) announced that it will purchase Japanese government bonds (JGBs) to keep the yield on 10-year JGBs around zero; the BOJ also announced that it will continue to expand the monetary base until consumer price inflation exceeds the 2 percent target and stays above the target in a stable manner. No further changes were announced following the BOJ’s October meeting. The European Central Bank kept its policy stance unchanged at its October meeting while signaling that further changes to its asset purchase program could be announced at its next meeting.

Finally, a troubling warning from one of the dissenters, Esther George:

Ms. George judged that, with the labor market near full employment and inflation approaching the Committee’s 2 percent objective, another step in the gradual adjustment of monetary policy was appropriate. While a low level of the target range for the federal funds rate had supported achieving the Committee’s objectives, such low levels were no longer warranted and, if maintained, could pose a risk to the sustainability of the economic expansion with stable inflation. In particular, she viewed the supply-side benefits of allowing labor utilization to rise above its neutral level as temporary, and noted that monetary policy was unable to affect the longer-run growth potential of the economy.

* * *

And the full Statement: