Fed minutes put November rate hike on the table

Federal Reserve officials last month kept a key interest rate unchanged but saw the decision as a “close call.” Many believed that the case for a rate hike had strengthened in recent months.

Minutes of the Sept. 20-21 meeting released Wednesday showed Fed officials were inching closer to hiking rates for the first time since last December. But they decided to hold off, given that inflation was still running below their 2% target and there was little sign of rising wage pressures.

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The minutes said that some officials believed it would be appropriate to raise rates “relatively soon” if the labour market kept improving.

“The minutes released today only added fuel to expectations for a near-term rate hike,” says CIBC World Markets director Royce Mendes.

Many economists expect the Fed to keep rates unchanged at the next meeting in November but raise rates by a modest quarter-point in December, but Mendes says November is a real possibility (the next Fed meeting occurs on Novermber 1st and 2nd, and no press conference is scheduled).

“Now that the warning shot has been fired, as long as the economy continues to post decent results, it appears to be a question of when and not if the FOMC hikes rates before the end of the year, with November now clearly on the table,” he writes in a note to investors.

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The minutes, released after the customary three-week lag, covered the Fed’s Sept. 20-21 meeting. After that meeting, the Fed announced that it was keeping its key interest unchanged but sent a strong signal that it could raise rates before year’s end.

The September decision was approved on a 7-3 vote with a rare three dissents. Three presidents of Federal Reserve regional banks — Esther George of Kansas City, Loretta Mester of Cleveland and Eric Rosengren of Boston — all dissented. All wanted the Fed to raise rates at the September meeting.

In a research note, RBC Capital Markets says, “Minutes of the September FOMC meeting indicate participants ‘generally agreed’ that the case for a rate hike had strengthened, and while only three dissented in favour of a rate hike, several stated that the decision was a ‘close call.'”

Further, says RBC, “Among those who wanted to see further progress toward the Committee’s objectives, some expected it would be appropriate to raise rates ‘relatively soon’ if the labour market and economic activity continued to strengthen.”

The deep divisions in the Committee were evident in the minutes, which said that the officials pushing for an immediate rate hike were concerned that further delay risked eroding the Fed’s credibility, “given that recent economic data had largely corroborated the committee’s economic outlook.”

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But the majority of Fed officials argued for delay, contending that inflation was still very low and three was still room for the unemployment rate to fall further without triggering high inflation.

Last week, the government reported that employers added 156,000 jobs in September, fewer than the 167,000 in August and well below last year’s monthly average of 230,000.

Analysts believe that the central bank will wait until its last meeting of the year in December before raising rates. It’s not expected to make a move sooner, given the November meeting will be just a week before the presidential election.

In its research note, RBC says, “Consensus appears to be growing for a December rate hike, should the Committee see further progress toward its objectives. Recent data seems to be on the right track with additional evidence that growth picked up in Q3 (and strong survey readings pointing to momentum heading into Q4) and another solid employment gain recorded in September. […] On balance, recent developments have been enough to push up the odds of a December rate hike after market pricing barely budged following September’s meeting.”

Michael Dolega, TD Economics senior economist, toes the same line in his commentary. He notes, “All in all, the minutes do not alter our view that the Fed is likely to tighten policy in December if the data continues to come in relatively constructive, and [if] global financial markets remain calm in the coming months. Having said that, any hike is likely to come with strong messaging whereby the Fed telegraphs a very gradual, or gentle, tightening cycle ahead.”

In December last year, the Fed hiked its benchmark lending rate after leaving it at a record low near zero since December 2008.

It indicated at the time that it might raise rates another four times in 2016. But since then, turbulence in financial markets, concerns about China and an unexpected vote by Britain in June to leave the European Union have prompted the Fed to delay further rate hikes.