The minutes for the September meeting indicate that, if the FOMC judges that the outlook is broadly consistent with current expectations, they are prepared to hike in December—a message consistent with the strong consensus for a third hike that was reflected in the median dot for this year. In effect, the December decision will be based more on the forecast than on the data. The minutes are consistent with our call that there will be a hike in December, and nudged our assessment of that probability up slightly, to about 70%. Still not a slam dunk!
The main takeaway from the minutes is, not surprisingly, consistent with the distribution of dots for this year: There is a fairly strong consensus for a December hike, and the incoming data on inflation is unlikely to dissuade the Committee, barring any major surprises.
▪ The key quote is: “Consistent with the expectation that a gradual rise in the federal funds rate would be appropriate, many participants thought that another increase in the target range later this year was likely to be warranted if the medium-term outlook remained broadly unchanged.”
▪ Think of the “medium-term outlook” in this case as the median projection for the next couple of years. ▪ This contingent of “many participants” seems very likely to support a rate hike in December because it’s difficult for a couple of months of data to meaningfully change the medium-term outlook. ▪ Still, “several others,” who likely were also part of the consensus reflected in the September dots for a third hike this year, said their support ultimately would depend on the incoming data giving them more confidence that inflation was headed to 2%.
▪ A few were more concerned about upside risk to inflation, accounting for the dots that implied more than three hikes this year.
All saw the outlook for growth and the labor market as unchanged and quite good. But the outlook for inflation appeared to provoke more discussion.
▪ “Many” still expected that cyclical forces would show through and boost inflation to 2% over the medium term. Moreover, many thought that “at least part of the softening in inflation this year was the result of idiosyncratic or one-time factors, and, thus, their effects were likely to fade over time.”
▪ Given this view, the decision would be based more on the forecast and be less sensitive to the limited incoming data before the December meeting.
▪ But there was also discussion of more persistent factors that might be in play, and “many participants expressed concern” that low inflation readings might reflect “the influence of developments that could prove more persistent.” For example, it was noted that factors holding down health costs recently “might continue to do so for some time.”
▪ “Several” were concerned that continued low inflation would threaten to lower longer-term inflation expectations and called for a more patient pace of hikes. Participants “generally viewed” the data as suggesting that longer-term inflation expectations remained “reasonably stable, although a few participants saw some of these measures as low or slipping.”
▪ Reflecting on some of these considerations, several now expect that it will take longer to get to the 2% objective, consistent with the downward revision in the median projection for core PCE inflation from 2.0% to 1.9% in 2018.
▪ Several noted that the forthcoming inflation data would be muddied by potential effects of the hurricanes in “energy costs and in the prices of other items affected by storm-related disruptions and rebuilding.”
On balance we see the more forecast-based camp as predisposed to a December hike and expect that many in the wait-and-see camp will, in the end, join the consensus even if the incoming inflation data remain cloudy.