Just prior to Wednesday’s release of the September meeting minutes of the Federal Open Market Committee (FOMC), most market participants were anticipating that the Federal Reserve would hike interest rates again in December. After the release, December’s meeting is still in play, with markets pricing in about a 75% probability of a policy rate hike. The minutes state that “many” Fed policymakers “thought that another increase in the target range later this year was likely to be warranted,” reinforcing that the Fed will likely hike if data plays out as the committee expects over the next few months.
Inflation below target
On inflation, which has continued to lag below the Fed’s 2% target (the Fed’s preferred inflation measure is personal consumption expenditures or PCE), policymakers “expressed concern that the low inflation readings this year might reflect not only transitory factors, but also the influence of developments that could prove more persistent.” While this concern doesn’t seem to be derailing the likely hike in December, both the Fed and market participants, including PIMCO, will continue to monitor structural factors that could be keeping inflation below target.
Any rumors of fiscal stimulus?
On fiscal policy, it’s interesting that “most participants had not assumed enactment of a fiscal stimulus package in their economic projections or had marked down the expected magnitude of any stimulus.” The Fed’s current monetary policy decisions (and most participants’ “dots” in the latest Summary of Economic Projections) are based on current fiscal policy and not intended to front-run potential policy. The legislative process is going to take time, and the destination for any potential fiscal stimulus is unknown.
In sum, the message from the Fed minutes is consistent with Fedspeak since the September meeting. While many on the Fed are “concerned” about recent low inflation prints, the committee still sees itself as “removing” accommodation, not tightening policy. All eyes will now be on whom President Trump chooses as the next Fed chair if he decides not to reappoint Janet Yellen.
Visit PIMCO’s Rise Above Rates page for our most up-to-date outlook for interest rates and insight into how we expect financial markets to be affected.
Richard Clarida is PIMCO’s global strategic advisor and a frequent contributor to the PIMCO Blog.