Delving into the minutes from the September FOMC (Federal Open Market Committee) meeting, I hoped to find answers to at least three questions:
- Was the decision not to hike policy rates in September really a “close call,” as some participants suggested after the fact?
- Did participants view global developments as a largely transitory headwind, or would they signal a lack of conviction that by December they would have reasonable confidence that inflation will return to target and see continued progress in the labor market sufficient for them to hike?
- How do participants define “continued progress” in the labor market? Is it robust gains in payrolls? A decline in the unemployment rate? Rising wages?
Not surprisingly, with 17 participants at the meeting (10 of whom vote), there appeared to be no unanimity on any of these points. That said, these minutes suggest that the decision not to hike in September was not a particularly close call for most members of the committee. Rather, different members appeared to have different reasons not to hike in September – global developments, concerns that inflation may not revert to target in coming years or a desire to let the economy run hot to pull more people back into the labor force.
But while September does not appear to have been a close call for most FOMC participants, the minutes indicate most of them did expect that a hike would be appropriate by year-end, and with somewhat more conviction than was implied by the communications immediately following the meeting on September 16-17 (the FOMC statement and Fed Chair Yellen’s press conference). Indeed these minutes seem more closely aligned with the messages in Yellen’s September 24 speech at Amherst than with any of the September 17 communications.
In sum, based on that Amherst speech and the minutes from the September meeting, the Fed thought that, at least before the release of the September payroll report on October 2, it would be hiking by the end of this year. But we will get two more payroll reports before then, as well as the report on third quarter U.S. GDP. The Fed reminds us it is “data dependent,” and between now and December, there will be a lot of data to depend on. And that is the tension: between data dependence, risk management and watching the clock.