FOMC minutes: It could become appropriate to raise rates relatively soon

The minutes from the November FOMC meeting, when the Federal Reserve, as expected, decided to leave interest rates unchanged at 0.25-0.5%, showed that the majority of officials wanted to wait for some further evidence of progress towards its inflation and employment objectives before rising rates and expressed that it could well become appropriate to raise rates relatively soon. 

According to the document and as the FOMC statement showed, members generally agreed that the case for an increase in the Fed Funds rate had continued to strengthen.  Some participants presented a case to hike at the next meeting in order to preserve Fed's credibility.

Regarding the economic outlook, the Fed continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would strengthen somewhat further. “Almost all of them continued to judge that near-term risks to the economic outlook were roughly balanced”, the minutes stated. 

At the November meeting, two members (Loretta Mester and Esther George), asked for a rate hike. “They saw inflation as close to the 2% objective and viewed an increase in the federal funds rate as appropriate at this meeting because they judged that the economy was essentially at maximum employment and that monetary policy was unable to contribute to a permanent further improvement in labor market conditions in these circumstances”. 

Overall the minutes did not add much more information. Most were already said within  the statement. The minutes had a marginal impact, so far, in the currency market. The US dollar continued to consolidate daily gains and remained in the same range where it was before the release. 

Next meeting

The next FOMC meeting will be December 13/14. According to the FedWatch Tool from CME Group, considering the price of the Fed Funds futures, the probability of a rate hike in December stand at 93.5%. After that meeting, Janet Yellen will hold a press conference and new economic projections from the FOMC staff will be released. 

Key Quotes: 

“Against the backdrop of their views of the economic outlook, participants discussed whether the available information warranted taking another step to reduce policy accommodation at this meeting. Based on the relatively limited information received since the September FOMC meeting, participants generally agreed that the case for increasing the target range for the federal funds rate had continued to strengthen. Participants saw recent information as indicating that labor market conditions had improved further and considered the firming in inflation and inflation compensation to be positive developments, consistent with continued progress toward the Committee's 2 percent inflation objective. However, a number of participants expressed the view that some modest slack remained in the labor market or noted that readings on inflation compensation and inflation expectations remained low. Moreover, some participants suggested that current conditions did not point to an immediate need to tighten policy or that some further evidence of continued progress toward the Committee's objectives would provide greater support for policy firming.”

“Most participants expressed a view that it could well become appropriate to raise the target range for the federal funds rate relatively soon, so long as incoming data provided some further evidence of continued progress toward the Committee's objectives. Some participants noted that recent Committee communications were consistent with an increase in the target range for the federal funds rate in the near term or argued that to preserve credibility, such an increase should occur at the next meeting."

“After assessing the outlook for economic activity, the labor market, and inflation, as well as the risks around that outlook, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent at this meeting. Members generally agreed that the case for an increase in the policy rate had continued to strengthen. But a majority of members judged that the Committee should, for the time being, await some further evidence of progress toward its objectives of maximum employment and 2 percent inflation before increasing the target range for the federal funds rate. A few members emphasized that a cautious approach to removing accommodation was warranted given the proximity of policy rates to the effective lower bound, as the Committee had more scope to increase policy rates, if necessary, than to reduce them. Two members preferred to raise the target range for the federal funds rate by 25 basis points at this meeting. They saw inflation as close to the 2 percent objective and viewed an increase in the federal funds rate as appropriate at this meeting because they judged that the economy was essentially at maximum employment and that monetary policy was unable to contribute to a permanent further improvement in labor market conditions in these circumstances.”