FOMC debates rate hike communication but not specific timing

Otmane El Rhazi from The Bullion Desk.

The US Federal Reserve sees improvements in US labour and inflation conditions and is laying the foundation for a future rate hike but the October minutes ultimately provided few clues on when exactly that might happen.

The Federal Open Market Committee (FOMC) is clearly concerned about upending the recovery and exacerbating market volatility by prematurely or ineffectively communicating the long-awaited rate hike. The market currently expects the Fed to raise rates in mid-2015.

Much of the FOMC’s debate centred on whether or not it should keep language in its policy statement that pledged to keep key short-term interest rates low for a “considerable time” even after ending its quantitative easing programme.

While some participants preferred to eliminate “considerable time” phrase, these committee members were concerned that such a characterization could be misinterpreted as suggesting that the FOMC’s decisions would not depend on the incoming data.

“A couple of them noted that the removal of the ‘considerable time’ phrase might be seen as signalling a significant shift in the stance of policy, potentially resulting in an unintended tightening of financial conditions,” the minutes said.

Meanwhile, other thought that the current forward guidance might be read as suggesting an earlier date of liftoff than was likely to prove appropriate, given the outlook for inflation and the downside risks to the economy associated with the effective lower bound on interest rates.

ON EUROPE AND ELSEWHERE

There was also quite a bit of discussion on economic developments abroad, with FOMC participants pointing to a somewhat weaker economic outlook and increased downside risks in Europe, China, and Japan.

“It was observed that if foreign economic or financial conditions deteriorated further, US economic growth over the medium term might be slower than currently expected. However, many participants saw the effects of recent developments on the domestic economy as likely to be quite limited,” the minutes said.

ON INFLATION

Most FOMC participants anticipated that inflation was likely to edge lower in the near term, reflecting the decline in oil and other commodity prices and lower import prices.

“These participants continued to expect inflation to move back to the FOMC’s two percent target over the medium term as resource slack diminished in an environment of well-anchored inflation expectations, although a few of them thought the return to 2 percent might be quite gradual,” the minutes said.

“A couple of participants noted that it was likely too early to draw conclusions regarding these developments, especially in light of the recent market volatility. However, many participants observed that the Committee should remain attentive to evidence of a possible downward shift in longer-term inflation expectations; some of them noted that if such an outcome occurred, it would be even more worrisome if growth faltered,” the added.

MARKETS SLIP

The reaction by US equity markets wasn’t particularly dramatic but prices did generally trend a little lower. The Dow Jones industrial average and S&P 500 were last down 0.22 percent and 0.35 percent respectively.

As for commodities, Comex gold futures were at $1,185.70 per ounce, which was $9.10 below the pre-FOMC levels, while most-actively traded Comex copper contract was at $3.0375 per pound, down 0.7 cents.

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