FOMC: Rate hike “relatively soon” - Natixis

Research Team at Natixis, suggests that the US Fed is drawing closer to announcing a hike in the Fed Funds rate as confirmed by the minutes of the September FOMC meeting.

Key Quotes

“As said earlier by Stanley Fischer, the Federal Reserve very nearly jacked up the Fed Fund rate at last month’s meeting, explaining that it had been a close call.

The market pricing increasingly anticipates a monetary tightening in December, with the probability put at 67%. This probability, as happened last year, should continue to rise to around 80% in November in all likelihood, mirroring the process in 2015 (expectations of a hike in September, but status quo maintained, then prepping of the market by the Federal Reserve which confirmed it will raise interest rates at the end of the year through a coordinated communication).

The Federal Reserve is indeed preparing for its second interest rate hike. Soon it will be possible to start talking about a tightening cycle.

It was already known, but three of the ten members of the FOMC dissented, voting against the decision to maintain the status quo, not supporting the position of the FOMC as communicated in its final statement.

Minutes confirmed that the decision of no hike at the September FOMC meeting was a close call. Members expressed different views on the amount of slack left in the economy and the risk to have to tighten more abruptly in the future. Overall, the information received is consistent with another rate hike in December.

The debate is taking another dimension

With improving labor market conditions and a nearly balanced global and financial environment most members agree that rate hike is likely “relatively soon”. Keeping in mind that not much has changed since the September meeting the Fed is unlikely to rush into the November window and will probably wait December before resuming its tightening cycle. In our view today’s information is very consistent with such a scenario.

Minutes were also interesting as they highlight a growing disagreement on the amount of slack left in the economy. More members judge that the cost of waiting has increased recently with signs of tightening labor markets with very different implications for the pace of monetary policy tightening. This may reflect a growing appetite for the beginning of a “real” tightening cycle (ie. more than one hike per year).”