The FOMC minutes for the November revealed that the members still considered a rate hike in December is appropriate. Yet, they debated on the change in forward guidance regarding the pledge on “further gradual increases” in the policy rate. Some judged that the policy rate is near to the neutral level, while some suggested stressing the importance of incoming data on monetary policy decision. The members in general were upbeat on the economic developments. Yet, they were concerned about the negative impacts of Trump’s imposition of trade tariff on the economy, as well as the “volatility in equity markets was accompanied by a rise in risk spreads on corporate debt”.

December Rate Hike is Done Deal

According to the minutes, “Consistent with their judgment that a gradual approach to policy normalization remained appropriate, almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations”.

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G20 summit this weekend and OPEC meeting on December 6 should unlikely cause a dramatic shift in the monetary policy stance. Next Friday’s comes the US employment report for November. Non-farm payroll growth and wage growth would be closely watched. This would be followed by inflation report on December 12. Slight downside surprises should not affect the December rate hike. Yet, they might lead to a more cautious Fed on considering rate hikes in 2019 and 2020.

Change in Forward Guidance

As suggested in the minutes, the members noted that the forward guidance “might need to be revised at coming meetings, particularly the language referring to the Committee’s expectations for “further gradual increases” in the target range for the Fed funds rate”. “Many participants” suggested that a change of language with “greater emphasis on the evaluation of incoming data in assessing the economic and policy outlook” should begin in the upcoming meeting. This change would help “convey the Committee’s flexible approach in responding to changing economic circumstances”.

Neutral Rate

The minutes suggested that “a couple of participants noted that the federal funds rate might currently be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity and put downward pressure on inflation and inflation expectations”. As we mentioned in the previous report, the current Fed funds rate target (2-2.25%) is not really ”just below” or “near” the median neutral rate projected by Fed staff in September. Yet, as neutral rate is not a fixed number and can move according to economic developments. We would want to see if any downward shift on the median neutral rate at the December meeting.

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