Fed: Getting closer to the second hike in the cycle – Rabobank

Philip Marey, Senior US Strategist at Rabobank, suggests that the minutes offered a few more details about the key phrase in the FOMC’s statement of September 21 that ‘the Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.’

Key Quotes

“This phrase was intended to reflect the view of several members that it would be appropriate to hike relatively soon if economic developments unfolded about as the Committee expected. In fact, it was noted that a reasonable argument could be made either for an increase at this meeting or for waiting for some additional information on the labor market and inflation. Among the participants who supported awaiting further evidence of continued progress toward the Committee’s objectives, several stated that the decision at this meeting was a close call.

The hawks (three of them dissented formally) wanted to hike immediately because they feared that the unemployment rate could be pushed markedly below its longer-run normal rate over the next few years. If so, the Fed might then be forced to hike more rapidly, thereby posing risks to the continued economic expansion.

In contrast, some (doves) noted that the increase in the labor force participation rate this year suggested more room for labor supply to expand than previously expected, or that the slower progress in for example the unemployment rate and wage growth indicated that slack was being taken up at only a modest pace. This view suggested that proceeding cautiously with reducing monetary policy accommodation could promote further labor market improvement. Note that this view was already put forward by Chair Yellen during the post-meeting press conference on September 21.”