December FOMC could well be the time to raise rates, minutes show

When US rate-setters last met to decide on policy, they decided on unexpected changes to the wording of their policy statement because they thought their 15-16 December meeting "could well be" the moment to raise interest rates, the minutes of their conversations revealed.

The S&P 500 rose as the content of the Federal Open Market Committee's deliberations hit the wires, and was standing 22 points higher at 2,072 as of 19:10 GMT. The yield on the benchmark 10-year US Treasury note was coming off by one basis point to 2.26%, from where it had been standing just above 2.28% just before the release of the summary of that Fed meeting.

"Members emphasized that this change was intended to convey the sense that, while no decision had been made, it may well become appropriate to initiate the normalization process at the next meeting, provided that unanticipated shocks do not adversely affect the economic outlook and that incoming data support the expectation that labor market conditions will continue to improve and that inflation will return to the Committee's 2 percent objective over the medium term."

Tantalizingly, the minutes appeared to indicate that the meeting began with a discussion or debate on where short-term interest rates ought to be.

"Short-run r* was estimated to have recovered only partially and to be close to zero currently, still well below levels that prevailed during recent economic expansions when the unemployment rate was close to estimates of its longer-run normal level," the minutes read.

Just as important, those rate-setters who were in favour of raising rates in December indicated that the medium-term implications for the economy of the hike would be a key factor in the decision-making process.

For some analysts, that seemed to indicate the FOMC might be trying to telegraph that while it might move in December the path of rate hikes would be lower than that suggested in its famous "dot-plot" graphs.

Analysts weigh in

"The risks of keeping the rate unchanged are outweighing the potential damage done by hiking sooner rather than later but the fact that there is still internal debate reduces the probability of a rate hike in December.

"The Federal Reserve has talked itself into a corner as macro conditions have deteriorated even as the U.S. economic recovery appears to be back on track," wrote Alfonso Esparza at Oanda.

"In one line: Caveats galore, but December hike still the most likely bet," Pantheon Macroeconomics said in a research note sent to clients.

""Most" participants at the October FOMC saw risks from overseas markets and economies having "diminished"; "most" anticipated that the conditions for tightening "could well be met by the time of the next meeting"; a "number" argued that "a decision to defer policy firming could be interpreted as signaling lack of confidence in the strength of the U.S. economy or erode the Committee’s credibility"; and participants "noted" that earlier action "would make it more likely that the policy trajectory after liftoff could be shallow”."

As of 20:10 euro/dollar was 0.02% higher at 1.0651.

"The minutes from the FOMC’s 28 October meeting were crystal clear: without an unanticipated shock that adversely affects the economic outlook, the Fed will raise rates in December. [...] Overall the minutes were in line with our expectations: a balanced tone ahead of October’s employment report and a clear signal that the Fed is ready to raise rates," said BNP Paribas's US Economics team.

-- More to follow --