S&P Dow Jones
24 August 2015
The September Federal Open Market Committee (FOMC) meeting is shaping up to be a real cliffhanger. The minutes of July’s meeting didn’t give a clear signal regarding the September move for a rate hike. It is clear, however, that the participants are not in agreement yet. The Fed’s downside risks have increased since their meeting in July: Oil and commodity prices have declined further, and economic and financial developments abroad, especially in China, have deteriorated. We believe the odds for a liftoff have shifted to December from September, though it remains a close call given that domestic economic data since the July meeting continue to be more positive than negative.
The economic releases this week include:
The July FOMC minutes released on Aug. 19 indicated less conviction among Fed members on their two mandates, which left markets guessing on the Fed’s next move. The minutes said that “most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point.” With FOMC members relatively convinced that the jobs market was strong enough for them to initiate a hike, they weren’t “reasonably confident” that inflation outlook was improving. Finally, the minutes highlighted more division between committee members and less conviction in discussions on labor and inflation–not a unified front when they decide on when to initiate the first rate hike in almost 10 years.
Even member agreement on an improving jobs outlook had caveats. FOMC participants agreed that “labor market conditions had improved further” with “many” voters thinking that slack “would be largely eliminated in the near term” if their forecasts were realized. But not everyone agrees with that rosy outlook. “Several” members contended that “some noticeable margins of slack remained.” And while several saw “labor market conditions as at or very close to” maximum employment, others were concerned that “maximum employment could take longer to achieve, noting, for example, the lack of convincing signs of accelerating wages.” That doesn’t bode well for agreement on when to move.
The inflation outlook was even more muddled in the July minutes. While “most” participants still thought that the downward pressure on inflation from low energy prices and a strong dollar would “prove to be temporary” and that inflation would increase to the committee’s objective over the medium term, some participants disagreed, noting that “incoming information had not yet provided grounds for reasonable confidence that inflation would move back to 2% over the medium term” and that the inflation outlook thus “might not soon” meet conditions needed to initiate a firming of policy.
Still, they did agree on one thing. “Almost all members” said that they need more evidence that economic conditions had “firmed enough for them to feel reasonably confident that inflation would return to the committee’s longer-run objective over the medium term.”
While the Fed has not ruled out a September hike, the bar has been set a bit higher than earlier thought. It seems that the “burden of proof” is on September’s shoulders. Incoming data now needs to support a September hike “beyond a reasonable doubt,” rather than strongly argue against it. Overall, we believe the odds for a liftoff has shifted to December, though we’ll still be keeping our eyes on the incoming news to see if the needle moves closer to a September move. Given a more divided committee, we suspect there will be a few dissents either way.
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