Fed Minutes Could Show Depth of Hawkish Rebel Camp in FOMC

Updated on
  • Fed watchers looking to tally hike support among non-voters
  • Critical debate likely to center on labor market, inflation

UBS Sees Rates Rising in December Amid Mounting Pressure

Minutes of the Federal Reserve’s September policy meeting could illuminate the degree of pressure Chair Janet Yellen faced from officials eager to raise interest rates, insights that could help guide expectations on the likelihood of a hike by year end.

The record of the meeting, during which policy makers left the federal funds rate target in a range of 0.25 percent to 0.5 percent, is scheduled to be released at 2 p.m. Wednesday in Washington. In a speech on Sunday, Fed Vice Chairman Stanley Fischer said the decision was a “close call.”

Three of 10 voters on the FOMC dissented in the Sept. 21 hold, arguing for a rate increase instead. Seven other officials participated in the meeting and expressed their views but are not FOMC voters this year.

“I would look for quantifications of how many participants shared the views of the three dissenters,” said Roberto Perli, partner at Cornerstone Macro LLC in Washington. “That might give us a sense of whether a hike this year is a solid base case, or whether it could go away with just some mildly disappointing data.”

Investors currently assign about a two-thirds chance of a December rate increase, based on prices in federal funds futures contracts, and a less than 20 percent chance of a move next month.

September’s FOMC decision marked the first time in five years that three voters broke rank with the chair in favor of a rate increase. Yellen has worked hard in her two-plus years at the helm of the U.S. central bank to maintain consensus within the committee in favor of keeping rates low, a consensus that is beginning to unravel.

The Fed’s five governors and the president of the New York Fed hold permanent votes on the FOMC. Four additional votes rotate annually among the 11 remaining regional Fed bank presidents.

Notable Dissent

The most notable dissent came from Boston Fed President Eric Rosengren, who long supported ultra-low rates in order to push down unemployment. With the jobless rate at or below 5 percent so far this year, Rosengren now says the Fed risks derailing the recovery by overheating the labor market and triggering inflation. He has also warned that low rates may feed financial bubbles.

“I’d expect the minutes to continue to highlight the sharp difference of opinion between those who want to raise rates, either as a preemptive strike against inflation or for reasons of financial stability, and those who want to see evidence of inflation moving higher first,” said Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore.

In the FOMC statement following the September meeting, officials said the case for a rate increase had strengthened, but they decided “to wait for further evidence of continued progress toward its objectives.” Yellen, in her press conference that followed, said she hoped keeping rates on hold would help draw more Americans into the work force.

The minutes could reveal more about dovish arguments raised at the meeting against a September rate increase.

China, U.K.

Torsten Slok, chief international economist at Deutsche Bank AG in New York, said the doves in September had fewer international risks to point to than in past meetings. Early this year, worries over slowing growth in China helped put the Fed off a potential hike, and the U.K.’s vote in June over European Union membership weighed on June and July meetings.

In September, the horizon was relatively clear of potential triggers to a global shock.

Slok said that may have forced the doves to debate Rosengren’s concerns about inflation and financial stability. He’s hoping the minutes will reveal, in particular, their views on inflation.

The Fed’s preferred measure of inflation, after stripping out volatile food and energy, ticked up to 1.7 percent in the year through August.

“Some of them have said they don’t want to raise until they see the ‘whites of their eyes’ on inflation,” said Slok. “What is ‘the whites of their eyes’? Is it 1.7 percent? Is it 2?”

Economist agreed the minutes could shift expectations for a December hike, but are unlikely to create any serious anticipation for a November increase. The FOMC’s next meeting is scheduled for Nov. 1-2, a week before the U.S. presidential election. That gathering won’t be followed by a Yellen press conference.

“It seems rather unlikely that they would actually move then, without quite surprising data over the next month,” said Johns Hopkins’s Wright.

Joseph Lavorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, said declarations from Fed officials that November is a “live meeting” hold little sway with investors. Instead, next month “the Fed will likely make a strong case for a Dec. 14 rate increase,” he wrote.