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Last night the US Federal Reserve released the minutes of its Federal Open Market Committee (FOMC) meeting from September. That was when the FOMC voted to keep its key Fed Funds rate unchanged and trading within a band of 0.25-0.50% - as expected. Many analysts had already put their reputations on the line in stating that the Fed wouldn’t want to raise rates so close to the US Presidential Election. Nevertheless, that didn’t stop Fed Chair Janet Yellen using her speech at Jackson Hole at the end of August to insist that the case for a rate hike had “strengthened” over the past couple of months. Then her Vice-Chair Stanley Fischer stated that Dr Yellen’s comments were entitrely consistent with two rate hikes before the year-end.

But as the September meeting approached, there was a sudden back-pedalling, culminating in FOMC-voting member Lael Brainard effectively kiboshing expectations of monetary tightening. What was interesting was that three FOMC members - Esther George, Loretta Mester and Eric Rosengren dissented and voted for an immediate 25 basis point hike. So, last night’s release of the minutes from this meeting were of some interest.

The trouble is that there is some argument concerning whether the minutes were dovish or hawkish. In other words, did the minutes suggest that the Fed is preparing to hike in December or hold off yet again?

Some of the key points: several FOMC  members said that the decision to wait was a “close call” and several said that they saw a rate hike coming “relatively soon.” It was also noted that a “reasonable argument” could be made for a hike and that several participants were concerned that another delay “risked eroding its credibility, especially given that recent economic data had largely corroborated the Committee’s economic outlook.”

On the face of it this all sounded pretty hawkish and keeps live the prospect of a December rate hike. However, the market reaction suggested that investors viewed them as dovish as the dollar sold off and precious metals rallied. The major US indices ended little-changed and it’s difficult to work out if today’s sell-off is on the prospect of monetary tightening, nervousness ahead of the election or concerns over corporate earnings and China’s declining Trade Surplus.

The sad fact remains that the Fed is stuck in a loop. It has to convince investors that the US economy is strengthening and robust enough to handle tighter monetary policy. At the same time it has to come up with excuses to say that it is worth delaying for a little longer, in order to keep a bid under stocks. The Fed knows it has to push rates up from current levels to have ammunition to cut when the next recession hits. But it also knows that it risks hiking into economic weakness. This isn’t just a domestic issue. Fears over the fallout of the UK’s vote to leave the EU(see sterling), trouble within the European banking system (see Deutsche Bank) and a sharp slowdown in China (see yesterday’s slump in the Trade Surplus) are all major signals of problems to come. These could all be rolled out as excuses in December when the Fed chickens out from hiking once again. Unfortunately, this could also end up confirming the dissenters’ concerns over further damaging the Fed’s credibility. 
    
  
Disclaimer:

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin

Category: PM Bulletin


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