FOMC Minutes Recap: The three-legged hawk – Nomura

Research Team at Nomura, suggests that overall, the minutes from the September 20-21 show a hawkish shift from the July meeting, making Nomura more comfortable with their forecast that the FOMC will raise rates in December.

Key Quotes

“In September, three members voted to raise rates for a variety of reasons, while several members “stated that the decision at this meeting was a close call.” The minutes show the increased hawkishness stool has three legs: risks of the economy overheating, credibility, and more balanced risks.

Some of the disagreements stem from differences in opinion in how much slack there is in the economy and how quickly that slack would dissipate. The minutes said that participants “offered differing views about the extent of slack.” Some participants argued that the combination of the slowdown in job gains and modest wage inflation pointed to “little or no remaining slack,” while some others cited “still muted wage growth,” elevated levels of involuntary part-time workers and recent increases in the labor force participation as an indication of remaining slack.

Notably, the Committee discussed “the likelihood of, and the potential benefits and costs associated with, a pronounced undershooting of the longer-run normal rate of unemployment than” their projections. This was a relatively new topic.

In addition to a tightening economy, a hawkish argument was also made because of credibility, or the lack thereof, if the Committee didn’t vote to hike. Specifically the minutes read, “Several participants expressed concern that continuing to delay an increase in the target range implied a further divergence from policy benchmarks based on the Committee’s past behavior or risked eroding its credibility, especially given that recent economic data had largely corroborated the Committee’s economic outlook.” This seemed to be also one of the reasons why regional Fed presidents George and Mester dissented at the September meeting.

Finally, in addition to views about the economy and the outlook, there was also a change in tone about risk assessment. In July, Brexit was a larger concern, whereas the September minutes stated, “A substantial majority now viewed the near-term risks to the economic outlook as roughly balanced, with several of them indicating the risks from Brexit had receded.”

In our view, the minutes seem to lean “hawkish” and suggest that the FOMC is on track to raise rates this year. Even among participants who supported awaiting further evidence of continued progress toward the Fed’s dual mandate, “several” stated that the decision at the meeting was “a close call.” This implies that there is likely a consensus growing toward the timing of the next rate hike.

We think that the next rate increase will come at the December meeting, as long as the data are broadly in line with expectations. A rate hike in November remains a possibility but given that the meeting is scheduled so close to the election, we think it will hold off on making any changes to monetary policy until the December meeting.”