The FOMC minutes for the September meeting anchored the Fed’s stance to hike policy rate for one more time this year. While the views on economic growth developments remained broadly unchanged from previous meetings, the members appeared more concerned over the inflation outlook. The minutes included detailed discussions on the impacts hurricanes Harvey, Irma, and Maria. Yet, they were expected to have limited impacts on US growth and inflation. The market has priced in almost 90% chance of a rate hike in December. The bet shows little change after the release of the minutes.

There was a long discussion on inflation. As the minutes suggested, ‘many’ participants continued to believe ‘cyclical pressures’ would ‘show through to higher inflation’ in the medium term and ‘many judged that at least some of the softening this year to be idiosyncratic’. Moreover, the members ‘continued to project that inflation would edge higher in the next couple of years and that it would reach the Committee’s longer-run objective in 2019’. Note that the phrase ‘edge high’ is less hawkish that the term ‘increase’ used in July. On the other hand, the minutes also suggested that ‘several’ participants were concerned that ‘the persistence of low rates of inflation might imply that the underlying trend was running below 2%, risking a decline in inflation expectations’. On net, the FOMC ‘on balance’ forecasted that PCE inflation would stabilize around the target over the medium term. This was compared to ‘most participants’ in the July minutes.

On the growth outlook, the members suggested that that the economy was ‘rising at a moderate pace’ in 3Q17 ‘before the landfall of Hurricanes Harvey and Irma’. They expected the negative effects of those disasters would ‘restrain national economic activity only in the near term’. The members acknowledged solid payroll growth and noted that the unemployment rate remained low. They, however, also noted that the ‘Increases in most aggregate measures of hourly wages and labor compensation remained subdued’.

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These would unlikely alter the Fed’s rate hike schedule. The minutes revealed that 12 out of 16 participants projected three rate hikes in 2017. Many believed that another rate increase in this year was likely to be warranted ‘if the medium term outlook remained broadly unchanged’. ‘Several’ would see if ‘the economic data in coming months increased their confidence that inflation was moving up toward the Committee’s objective’ while ‘a few’ indicated that ‘additional increases in the federal funds rate should be deferred until incoming information confirmed that the low readings on inflation this year were not likely to persist’ and ‘that inflation was clearly on a path toward the Committee’s symmetric 2%’ target in the medium term.


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