A UK perspective on US business and finance
Interest Rates: Five Things We Learnt From The Fed's Latest Minutes
Nov 19, 2015
More hawkish tone detected in latest post-meeting bulletins was reflected in October minutes
Since the Federal Reserve's last policy meeting in late October – and the latest strong US jobs figures – the market has been betting on an interest rate rise taking place next month.
Yesterday the minutes of the October meeting were released. Did they add to the case for the first rise in nearly a decade, or did they dampen enthusiasm?
1. Judging by the report, there are definite hints of a potential 'lift off' in December.
The Daily Telegraph notes that "most" of the central bank's policymakers believed the conditions to tighten policy "could well be met" by the time of its next meeting on 15 December. Policymakers also generally said they wanted to "convey the sense" that they believed it may be "appropriate" to raise rates next month.
2. The major shift – compared to a surprisingly dovish September meeting – suggests there's a belief that the risks to the US economy from external factors has receded.
Fears in particular that the Chinese economy will have a hard landing, with knock-on effects on manufacturers and exporters around the world, have mostly abated. "The US financial system appears to have weathered the turbulence in global financial markets without any sign of systemic stress," the minutes state.
3. Back at home, the policymakers believe there are signs that "private domestic demand" will "support economic growth going forward", notes FastFT, while a buoyant jobs market is making the case for a rise more compelling.
It's worth remembering that this meeting came before the October jobs report was published earlier this month, which showed that 271,000 jobs were created in October in the US and that wage rises had accelerated. The Fed has made the labour market a key determinant in its decision to increase rates and these numbers are a strong positive signal in that direction.
4. There is always a 'but' in Fed reports, however, and this time it comes in the form of inflation.
While there was more confidence that the energy price and strong dollar holding back consumer prices "would prove temporary", the report also contains a statement that inflation would need to be seen to be moving back towards the two per cent target for a rates rise to be a viable proposition. Inflation rose to 0.2 per cent in October, but there's a big question mark over whether this will prove to be high enough to tick that box on the Fed's check list.
5. Divisions also remain, despite the overall shift.
CNBC says that the committee is "more divided… than it's been since Janet Yellen chaired her first meeting in March 2014". Certainly more committee members are now considering voting for a rates rise, but others remain stubbornly dovish while a couple of members are even discussing what further stimulus could be provided if the economy starts to flag again.
So will the Fed vote for a rates rise in December?
That's the million dollar question – and some Fed committee members would rather it wasn't. As recorded in the minutes, there is a growing feeling that the "path of policy, rather than the timing of the initial increase, [is] the more important influence on financial conditions". Basically, members want to get this first rise – and the market's obsession with it – out of the way.
There is also a general sense that the economy can handle an increase. The jobs market could hardly be in better shape, domestic demand is relatively strong and companies appear to be weathering headwinds well. Economists at BNP Paribas say the minutes are "crystal clear" that "without an unanticipated shock... the Fed will raise rates in December".
But CNBC points to the "wiggle room" that the committee has left itself – and some members will not be swayed from their dovish stance. While an increase is more likely than not, don't rule out the committee voting to keep rates as they are – but be prepared for an adverse market reaction if it does.
Interest rates: why double deflation will not change lift-off timing
Annual consumer prices in Britain remained negative throughout October, marking the first time there have two consecutive months of deflation since records began in 1996, according to official figures.
Data from the Office for National Statistics shows that the Consumer Price Index basket of goods fell by 0.1 per cent last month relative to the year before, dragged down as in previous months by the sharp slump in fuel prices.
The Daily Telegraph reports that lower university tuition fees and cheaper food, alcohol and tobacco have all helped to offset the rising cost of clothing and footwear.
The stagnation in price pressures – inflation has been at or near zero for the past nine months – is not expected to make a material difference to the timetable for an interest rates increase. Here are three reasons why:
1. The Bank of England prefers a measure of 'core' inflation that strips out volatile food and energy prices. This underlying rate has also been low, but it did pick up slightly last month and came in at a little above expectation at 1.1 per cent.
2. Headline CPI inflation is set to converge with core inflation in the new year, as the anniversary of the end of the nosedive in global oil prices approaches. Brent crude plummeted from around $115 a barrel last June and hit a nadir of $45 in mid-January, before recovering. It has remained at around this level ever since.
This means that from January 2016 onwards, the big drag effect of lower fuel prices in the annual comparison will fall out of the dataset and CPI could immediately jump to around one per cent. Only another move lower in the oil price will distort this trend.
3. Wages in Britain are currently growing at a decent pace of around 2.5 to three per cent annually, with the jobs market showing signs of improvement and even productivity finally beginning to pick up. This means living standards for most are on the up and this should eventually feed into underlying prices. Some analysts fear this could happen faster than is currently expected.
So when can we expect interest rates to rise in the UK? Markets still reckon late 2016 or early 2017 is the most likely prospect, but this forecast will probably be pulled forward if the US Federal Reserve votes to increase rates as expected next month.
Most economists are predicting a rates rise in the first half of next year, probably late spring or early summer.
"Inflation still looks likely to rebound over the coming months, giving the MPC the green light to start raising interest rates from the second quarter of 2016," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
Interest rates: is the Fed heading for a December rise?
Traders obsessing over the timing of a US interest rates rise had plenty to chew over on Thursday, as no fewer than five Fed officials gave speeches that directly addressed this increasingly charged debate. Here's what they said – and what it means.
Stanley Fischer, Fed vice chairman
Fischer's remarks largely concentrated on the arguments against a rates rise and seemed to indicate that he sees them dissipating. He reiterated "previously stated confidence that more inflation was around the corner" and said the US economy is "weathering reasonably well" the "sizable shock" of the strong dollar and slowing global growth, notes CNBC.
"Some of the forces holding down inflation in 2015, particularly those due to a stronger dollar and lower energy prices, will begin to fade next year… While the dollar's appreciation and foreign weakness have been a sizable shock, the US economy appears to be weathering them reasonably well, notwithstanding their large effects on certain sectors," he said.
William Dudley, New York Fed President
Dudley, another permanent voting member of the 12-member Federal Open Market Committee, has been " hesitant to commit to a rate hike" so far, says Reuters. But in a speech in New York he indicated that the risks of not acting were now "finely balanced" with those of lifting rates, marking a "subtle shift" in tone.
In particular, Dudley said the current seven-year low five per cent unemployment rate "could fall to an unsustainably low level" that threatens inflation. He also echoed the comments of some critics – some of whom say central bankers have already waited too long to normalise policy - that seven years of near-zero rates "may be distorting financial markets".
He still warned about the external risks, though, saying they should make rate setters "think carefully".
Charles Evans, Chicago Fed President
Evans is still very much a no-rate hike 'dove' and emphasised this again. He said inflation was likely to remain depressed "well into next year", which by the traditional analysis of the role of interest rates undermines the case for a hike, and highlighted risks coming from elsewhere in the global economy.
But even Evans managed to sound less alarmed than he might as he cited a "gradual" path of increases as "mitigating" any risks.
Jeffrey Lacker, Richmond Fed President
One of the five regional bank presidents that has a vote at the moment, Lacker has twice already voted for a hike this year – making him a rare hawk on the committee. He's not changed his tune.
Lacker said that the recent path of unemployment and underlying inflation "does not warrant such pessimism" as the Fed has displayed. Fox Business adds that he said recent inflationary trends "bolster the case for raising the federal funds rate target now".
James Bullard, St. Louis Fed President
Bullard does not have a vote this year, but like all Fed presidents he will participate in the discussion. He's also a noted hawk and, again, is only becoming more of the view that rates need to rise. Arguing that unemployment and inflation goals have been met, Bullard argued there is no reason to continue to "experiment" with policy extremes.
This all amounts to a justification for believing a rates rise is more firmly on the agenda than it has been in some time. Phillip Streible of RJO Futures told CNBC that traders are now pricing it in so confidently – the chances of a hike next month are seen at around 70 per cent – that "the Fed has to strike now or forever hold their peace".
But while Dudley notes the folly of waiting to "see the whites in inflation's eyes", without the pressure of price rises to force its hand, the committee remains vulnerable to any weak data points in the coming weeks. And some reckon that will lead to a familiar 'nearly but not yet' decision.
"Lucy's going to pull the football out from under Charlie Brown again. How many times do we have to see this?" Larry McDonald, head of US macro strategy at Societe Generale, said.