Fed Minutes Make a December Liftoff Look More Likely

December Fed Liftoff: How High Will They Go?
  • Brainard `undertow' seen in minutes' dovish comments
  • Center of FOMC lining up closer to Lacker, hawks for December

The hawks are in and the doves are out. At least for the moment.

Warning about risks to the labor market, skeptical about the eventual rise of inflation and nervous about global growth, Federal Reserve policy makers who are keen to delay an interest rate hike found themselves out of step with a majority of their colleagues at the Oct. 27-28 meeting of the Federal Open Market Committee, minutes released Wednesday in Washington showed.

“The doves lost,” said Diane Swonk, chief economist at Mesirow Financial Holdings Inc. in Chicago. And that defeat came, she added, before the release of a better-than-expected October jobs report that provided more evidence of an economy on solid ground.

In the statement following their October meeting, Fed policy makers made it clear that an interest-rate increase would be considered at their “next meeting,” which is scheduled for Dec. 15-16. The unusually direct signal helped lift investor expectations that the Fed will raise its benchmark lending rate for the first time in almost a decade.

Most Participants

The minutes revealed that “most participants” agreed the conditions that would trigger a rate increase “could well be met by the time of the next meeting” and “some” felt those conditions had already been met. That left “some others” arguing that it was “unlikely that the information available by the December meeting would warrant raising the target range for the federal funds rate.”

The minority resistance showed up, as well, when the committee debated how to word their Oct. 28 policy statement and whether to include the explicit reference to the “next meeting.”

While an unspecified number saw the language as ultimately leaving the committee’s policy options open, “a couple of members expressed concern that this wording change could be misinterpreted as signaling too strongly the expectation that the target range for the federal funds rate would be increased at the committee’s next meeting.”

Gang of Three

Laura Rosner, U.S. economist at BNP Paribas in New York said the hold-out doves were probably governors Lael Brainard and Daniel Tarullo, along with Chicago Fed President Charles Evans.

"It seems like Yellen is not in that group,” she said, referring to Chair Janet Yellen.

Brainard gave a speech in October outlining her case for delaying a rate rise, saying the potential damage caused by moving too soon would be harder to fix than the harm that might come from moving too late. Evans and Tarullo have argued against raising rates this year.

“On risk management, it’s really Brainard leading this camp,” Thomas Costerg, a senior U.S. economist at Standard Chartered Bank in New York, said. “You could really feel, between the lines, the undertow from Brainard” in the minutes.

It was likely the same group -- variously identified as “a couple,” “a few,” or “some” -- that pointed to a decline in market-based measures of inflation expectations, argued that “downside risks from abroad were still significant” and worried aloud over the weak employment reports in August and September.

Optimists Prevail

In each case, more optimistic views carried the day. The center of the committee stuck with the view that inflation would likely return to the Fed’s 2 percent target over the medium-term and concluded that global risks had significantly faded since concerns over China roiled financial markets in August.

Many members had doubts about employment, but those will have been assuaged by the October payrolls report, when employers added 271,000 new jobs, the largest monthly gain all year.

While he didn’t get his way in persuading the Fed to hike in October -- which led him to dissent for the second meeting in a row -- Richmond Fed President Jeffrey Lacker finds himself lining up with the FOMC consensus heading into December.

“He’s been waiting there long enough and its coming to him,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.

Feroli stressed, however, the shift on the committee reflects how the economy has evolved over time, and doesn’t signal any deeper change in the philosophies of FOMC members that will put the hawks in control of policy.

“Just because they get one hike doesn’t mean they’re going to feel like they’re winning all of next year,” he said.

Indeed, the minutes reveal repeated agreement across the committee that the Fed should proceed cautiously after liftoff.

“Participants generally agreed that it would probably be appropriate to remove policy accommodation gradually,” the minutes said.

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