FOMC minutes: “relatively soon” means December hike

From the FXWW Chatroom: The minutes from the early November FOMC meeting did not change the near term Fed outlook; in all likelihood the Fed will increase its target range for the fed fund rate at its December 13-14 FOMC meeting. In particular, most Fed officials saw rate hikes appropriate “relatively soon” while members generally agreed that the case for rate hikes had strengthened. Against the backdrop that the meeting was just a week ahead of the election, the Committee tried not make the December hike a complete certainty; just “some” participants said that a hike should happen already at the next meeting while a few advocated for a hike at the November meeting already. Some even said that economic conditions did not suggested much need to tighten.

But now with the election behind us and financial markets reacting so favourably to the incoming administration, the takeaway is that the December hike is coming our way. Arguably what is most important for the Fed is to make the expansion going as long as possible. Since the labour market is operating close to its capacity, to prevent overheating employment growth must slow down significantly before long. Indeed, many Fed officials saw stability risks and suggested that the risks to the outlook would likely increase without rate hikes. Credibility concerns were at play too; some participants noted that to preserve credibility a rate increase should occur at the next meeting. Meanwhile the reason for not hiking at the November meeting already was that the majority of members wanted more evidence of progress on the inflation front. What difference could a month possibly make?

In any event, markets are speculating that Donald Trump’s reflationary policies will mean a quicker pace of US monetary tightening and a hike at the December meeting is fully discounted; recent speeches from Yellen and Fisher have not suggested otherwise either. [SEB]

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