4 Takeaways from the November FOMC Minutes

The minutes for the November meeting got released yesterday, but the Greenback didn’t have an explosive reaction. Still, there were some important things that you may wanna keep in mind for the December FOMC meeting.

USD Index: 15-Minute Forex Chart

USD Index: 15-Minute Forex Chart

1. Rate hike “relatively soon”

According to the meeting minutes, “Most participants expressed a view that it could well become appropriate to raise the target range for the federal funds rate relatively soon.” However, this rather hawkish statement is conditional, since a rate hike can be expected “so long as incoming data provided some further evidence of continued progress toward the Committee’s objectives.”

As to why the Fed refrained from making its move during the November meeting, the minutes had this to say:

“Members generally agreed that the case for an increase in the policy rate had continued to strengthen. 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.”

In short, Fed officials are just being cautious. And, nope, the U.S. presidential elections were not discussed.

2. Fed wants to “preserve credibility”

The FOMC minutes revealed that some Fed officials are still worried about credibility, so much so that “some” Fed officials suggested hiking in December. The juicy bits are as follows (emphasis mine):

“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 should occur at the next meeting.”

Well, I suppose it’s only right that the Fed should be worried about its credibility. If y’all can still recall the December 2015 FOMC statement, the Fed originally projected that there would be room for 3-4 additional 25 bps rate hikes in 2016. However, Fed officials later downgraded their rate hike projections for 2016 from 3-4 to just 1-2 during the March FOMC statement.

Later, during the June FOMC statement, the Fed lowered its rate hike projection for 2017 from 5-6 hikes to just 4-5. And then, during the September FOMC statement, the Fed lowered its 2017 rate hike projections again to just 2-3 while simultaneously downgrading its 2016 rate hike projections to one (or even none at all). So, yeah, it’s only right that the Fed should be worried about its credibility.

3. Why the dissenters dissented

As I noted in my 3 Takeaways from the November FOMC Statement, Kansas City Fed President Esther L. George and Cleveland Fed President Loretta J. Mester dissented from the majority of FOMC members because they wanted to hike rates then and there.

November FOMC Voting Record

November FOMC Voting Record

George’s rationale for dissenting is as follows:

“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.”

The crux of her argument is that recent developments in employment and inflation are going in the Fed’s favor. There’s therefore no longer any reason to hold back on hiking rates. In fact, if the Fed keeps holding back, then there’s even a risk that the job market may overheat or that inflation will rise too quickly to the detriment of the U.S. economy.

As for Mester’s rationale for dissenting, here it is:

“Ms. Mester judged that the economy was essentially at full employment in terms of what can be achieved through monetary policy. The unemployment rate was at her estimate of its longer-run normal level, and labor market conditions were projected to tighten further. In addition, she noted that inflation was moving up and was close to the Committee’s 2 percent objective. In these circumstances, she believed it appropriate to gradually increase the target range for the federal funds rate from its current low level, which would allow monetary policy to continue to lend support to the economic expansion. A gradual path would allow the Committee to better calibrate policy over time as it learns more about the underlying structural aspects of the economy. Ms. Mester saw taking the next step in removing policy accommodation as consistent with the Committee’s communications about the appropriate path for monetary policy.”

To simplify, Mester is also saying that recent economic developments are favorable. Mester doesn’t fear potential economic instability the way George does. However, Mester also mentioned the Fed’s “communications about the appropriate path for monetary policy.” This implies that Mester is one of those Fed officials who are worried about the Fed’s credibility.

4. Fed on the stronger dollar

Take note that the November FOMC statement was before Trump’s victroy caused the Greenback to appreciate hard. With that said, here’s what the minutes had to say about a stronger Greenback (emphasis mine):

“Participants discussed possible policy implications of the risks surrounding the outlook for inflation, including the possibility that achieving the Committee’s inflation objective sooner than previously anticipated could cause a revision in market expectations of the path for policy rates and a sharp rise in longer-term interest rates, or the possibility that a further appreciation of the dollar stemming from developments abroad could renew disinflationary pressures and postpone the need for policy firming.”

Fed officials talked about it, but the minutes unfortunately didn’t reveal any of the details. Although it is interesting to know that the Fed did consider that a stronger Greenback may lower the need for further rate hikes.

Final Thoughts

The Greenback barely reacted when the FOMC meeting minutes got released. one of the probable reasons for this is that Fed Head Yellen already spilled some of the beans on the possibility of a December rate hike when she testified before the Joint Economic Committee last week.

Another probable reason is that a rate hike has already been priced in by the market, although this was also somewhat affected by Yellen’s testimony last week. Anyhow, we can look to the CME Group’s nifty FedWatch Tool for evidence. And as you can see below, the probability of a December rate hike stood at 93.5% after the minutes got released, unchanged from the previous day’s probability. Oh, for the newbies out there who have no idea how to read the CME Group’s Fedwatch Tool or what it’s all about, you can check out my primer for it here.

CME Group's FedWatch Tool

CME Group’s FedWatch Tool

So, with the U.S. economy in relatively good shape, a hawkish testimony from Fed Head Yellen, and the November FOMC minutes supporting Yellen’s hawkishness (if only to preserve credibility, according to some Fed members), are you expecting that the Fed will finally hike rates again after hiking back in December 2015? Share your thoughts by answering the poll below!

 


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