While today’s minutes from the October FOMC meeting suggested lingering doubts by some Committee members as to whether December would be the appropriate time to hike rates, it is important to note that at the time of the October meeting, October’s stellar jobs report had not been released yet. The September payrolls report showed a tepid gain of 142,000 with a downward revision of 59,000 to the prior two months of data, in contrast to the October report, where nonfarm payrolls rose by 271,000 and the unemployment rate dipped to 5%. Today’s minutes noted “almost all members agreed it was appropriate to wait for additional information to clarify whether the recent deceleration in the pace of progress in the labor market was transitory or reflected more persistent factors that might jeopardize further progress.” As such, it’s safe to say that Committee members’ thoughts on the strength of the labor market likely have improved greatly in the wake of the most recent data.
The return of inflation to 2% is clearly the bigger question for the Fed than is the question as to whether the U.S. economy is operating at full employment. Here, the post-meeting data set has been a little more ambiguous.
“Members continued to anticipate that inflation would gradually return to the Committee’s 2 percent objective over the medium term, but most of them were not yet sufficiently confident of that outlook to begin the normalization process. They generally agreed that their confidence would increase if, as anticipated, economic activity continued to expand at a pace sufficient to increase resource utilization. Other factors important to the inflation outlook were the expectation that the influence of lower energy and commodities prices and the stronger dollar would subside, and that longer-term inflation expectations would remain stable. In this regard, a couple of members expressed concern about the continued decline in market-based measures of inflation compensation. Moreover, the risk was noted that downward pressures on inflation from the appreciation of the dollar could persist.”
The dollar has continued to strengthen and oil prices have continued to slip (with crude trading through $40/barrel earlier), but there are some initial signs that inflation may be headed in the right direction, particularly now that 12-month shelter costs have risen by 3.2% while costs for medical care services are up by 3.0%. Even with the dissent of one FOMC participant (Lacker), “members generally agreed that, in light of some weaker-than-expected readings on measures of labor market conditions and in the absence of greater confidence about the inflation outlook, it would be prudent to wait for additional information bearing on the medium-term outlook before initiating the process of policy normalization.” Does this mean that a rate hike in December is a toss-up?
Likely, no. The Committee highlighted that “it was…the expected path of the federal funds rate, rather than the exact timing of the initial increase, [that] was most important in influencing financial conditions and thus in affecting the outlook for the economy and inflation” suggesting that December’s decision on timing is less important than the pace of cumulative hikes. Moreover, today’s minutes noted that the change in language (recall that the statement in October changed from “in determining how long to maintain this target range” to “in determining whether it will be appropriate to raise the target range at its next meeting” was “intended to convey the sense that, while no decision had been made, it may well become appropriate to initiate the normalization process at the next meeting, provided that unanticipated shocks do not adversely affect the economic outlook and that incoming data support the expectation that labor market conditions will continue to improve and that inflation will return to the Committee’s 2 percent objective over the medium term.” Provided that there are no violent swings in global financial markets and nothing changes the outlook for a slow, but steady return to 2% inflation, a December hike is likely to materialize.