Fed Minutes May Underline Depth of Backing for December Hike

(Bloomberg) -- Federal Reserve officials last month stuck with their forecast to raise interest rates one more time this year. A description of the debate during that confidential meeting of the Federal Open Market Committee, to be released at 2 p.m. on Wednesday, may show if this was a close call or a done deal.

Investors now see roughly an 80 percent chance of a hike at the Fed’s gathering in December, following comments by Chair Janet Yellen in late September that she was “wary of moving too gradually.”

“The minutes will signal again that a December rate hike is to be expected, absent a significant negative surprise,” said Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore and a former Fed economist. “I think the most interesting part will be what they say about financial stability concerns.”

Twelve of 16 Federal Open Market Committee participants favored at least one more rate increase this year, according to the forecasts submitted at the Sept 19-20 meeting.

The stability discussion could be front and center. A number of Fed officials including Yellen and Governor Lael Brainard have cited financial risks. In the minutes of June meeting, participants described stock prices as “high” and worried “increased risk tolerance among investors might be contributing to elevated asset prices more broadly.”

Inflation Puzzle

In addition, officials last month probably revisited their discussion of why inflation has failed to rise despite unemployment falling to a 16-year low. In July, minutes of that meeting showed this turned into a back-and-forth over the continued relevance of a long-standing framework for analyzing inflation in terms of how the economy was performing versus levels viewed as sustainable in the long term.

Signs of more policy makers joining the “few” in July who viewed the framework as not particularly useful for forecasting inflation could herald a wider shift in sentiment in favor of slowing rate increases until inflation rises toward the Fed’s 2 percent goal, which has been missed for most of the last five years.

“The ongoing inflation debate and its impact to future policy action is probably at the top of the list” with investors, said Sam Bullard, senior economist with Wells Fargo Securities LLC in Charlotte, North Carolina.

Fed officials in September slightly lowered their projections for core inflation this year and next and pushed back to 2019 the median forecast for when it will reach 2 percent a year.

Labor Department data Friday showed a 33,000 decline in U.S. payrolls in September, unemployment sank to 4.2 percent, and average hourly earnings increased 2.9 percent year-on-year. Yet the report was affected by recent hurricanes, which also was discussed by the FOMC.

The minutes might elaborate on the FOMC’s view that “past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.”

The biggest news of the meeting was the formal announcement of the plan to shrink the Fed’s $4.5 trillion balance sheet, which had been well-signaled in advance. While the FOMC vote was unanimous, the minutes could show whether there were any participants who had reservations.

The quarterly forecasts made at the meeting showed policy makers lowered their long-run estimate for a federal funds rate that keeps supply and demand in balance in the economy to a median of 2.75 percent, from 3 percent in the June. Discussion of that change might influence bond prices, said Roberto Perli, partner at Cornerstone Macro LLC in Washington.

“The fact that the median longer-run dot came down another quarter point suggests there are increasing doubts about the long-standing view that the neutral rate is likely to move up,” said Perli, a former Fed economist. “If it doesn’t, the longer-run dots are bound to come down further. It’s a matter of when, not if.”

Perli said that will matter even if President Donald Trump appoints a new Fed chairman because much of the FOMC, which has 19 members when every seat is filled, will stay the same, limiting the ability of a new leader to dictate policy to a committee. Yellen, whose term as chair expires in February, is said to be among five contenders under consideration by Trump to head the central bank.

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net.

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Alister Bull, Vince Golle