As I read through the Federal Open Market Committee (FOMC) minutes from the September meeting, I was looking for insights into the following questions that were not answered by the statement released when the meeting concluded on 21 September or by Fed Chair Janet Yellen’s press conference that immediately followed:
- How tilted was discussion toward a policy rate hike versus support for a risk-management-oriented “wait and see” approach?
- How much did members discuss the risks to financial stability of staying put, a concern of FOMC member Eric Rosengren, who, along with Esther George and Loretta Mester, dissented in favor of a rate hike in September?
- Was there any discussion at all of hiking at the November meeting, one week before the U.S. election on 8 November?
FOMC divided over risks of rate hike
Going into the September Fed meeting, markets indicated a 58% probability of a rate hike by the end of 2016. Going into today’s release of the minutes, the probability had increased to 67%.
The main takeaway from these 15 single-spaced pages is that the decision was a “close call” for several of the participants who did not in the end advocate for a rate hike in September. The committee remains divided over how much to weight risk management considerations – or even what the primary risks are. Some participants focus on the risk to financial stability of low interest rates and the risks to falling behind the curve as the economy achieves full employment, while others focus on the risk that a collapse in the neutral real rate of interest might mean that current monetary policy is in fact not that accommodative in the first place. In short, some in the Federal Reserve appear to believe that a fed funds rate of 0.25%–0.50% with core inflation of 1.5% on a PCE basis (the Fed’s preferred measure) and above 2% on a CPI basis is, in fact, close to neutral. And with these splits on the committee and no evident effort by the chair to forge consensus, there was no attempt to put November in play.
For the fourth meeting in a row, the Fed minutes contain a plea on behalf of some participants that the committee members and leadership recognize the “importance of clearly communicating to the public the conditions that would warrant an increase in the policy rate.” Clear communication is of course important. But first the committee needs to agree on what these conditions for a rate hike are in the first place.
Richard Clarida is PIMCO’s global strategic advisor and a regular contributor to the PIMCO Blog.