14.10 Weekly Viewpoint : FOMC: waiting for Godot?

The minutes of the September FOMC meeting confirm the deep split within the Committee on the risks associated with rate hikes and the difficulty of finding consensus on policy……

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The decision to leave rates unchanged in September, probably orchestrated by the centrists of the Board, led by Yellen, seems to be a compromise which preludes to a hike “relatively soon”. In our opinion, also in the light of generally favourable data, the FOMC will increase rates by 25bps in December and enter another period of reflection.

As expected, the minutes of the FOMC meeting of 21 September reveal a split within the Committee among groups with differing opinions on the costs and advantages of keeping rates stable. Several participants reported that the September decision was a “close call”. Consensus somewhat gelled around the opinion of the centrists of the Board, who had to strike a balance between two groups determinedly on opposite positions.

The minutes report widespread consensus on the fact that “the case for policy firming had strengthened”. Although a majority of members (i.e. the voters, not the participants!) considered it appropriate to wait for further data confirming that progress is being made towards achieving policy goals, “it was noted that a reasonable argument could be made either for an increase at this meeting or for waiting for some additional information on the labor market and inflation”. There is no section of the minutes without evidence of the deep split within the Committee, both on the assessment of risks and on the opportunity of trying to push the labour market further towards (and beyond) full employment, and on the wording of the statement.

However, there appears to be widespread consensus on a positive assessment of the economy, with growth expectations fuelled by solid consumption and a stabilisation of investments, leading to “roughly balanced” risks. The most intensely debated topic was the appropriateness of pushing the labour market beyond full employment. For some, the aim is to encourage a further increase in the participation rate. Others noted that in the past a decline of the unemployment rate even just a few tenths below the equilibrium rate was followed by recessions, as a result of fast monetary policy reversals prompted by rising prices and wages. The split will probably persist, as also evident in recent speeches.

While the minutes provide no indication of the timing of the next hike, they report widespread consensus on the fact that the evolution of economic conditions should be such as to require a gradual upward path for rates. Several members believed that a rate hike would be appropriate “relatively soon”, with data releases proving to be in line with the expected scenario. Furthermore, some participants noted that the Committee risked losing credibility by not hiking rates despite the materialisation of conditions in line with those indicated by the FOMC itself as necessary and sufficient for a move. The decision to stay on hold in September appears to be a short term compromise: the “centrists” do not seem to share the vision of the extreme doves.

Obviously, data will continue to rule: in mid-December, the Fed will have two more Employment Reports, after the September one (generally positive), two rounds of ISM surveys and inflation data, and a rather clear picture of growth in the second half of the year. We expect data to stay generally positive, allowing the long-debated rate hike to take place in December.

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