Fed came closer to raising rates in September, minutes show

Rate-setters in the States had moved closer to another interest rate hike, the minutes of the US Federal Open Market Committee´s last policy meeting revealed.

There was a general agreement among FOMC members and other participants at the meetings, which includes the regional Fed presidents, that the case for another tightening move had strengthened, but at the time many still believed that slack remained in the labour market and, for most them, that with inflation still running below the central bank´s target it would be best to hold off for the moment and gather further data.

Participants generally agreed that the case for increasing the target range for the federal funds rate had strengthened in recent months, the Fed said.

"Many of them, however, expressed the view that recent evidence suggested that some slack remained in the labor market. With inflation continuing to run below the Committee’s 2% objective and few signs of increased pressure on wages and prices, most of these participants thought it would be appropriate to await further evidence of continued progress toward the Committee’s statutory objectives," the minutes read.

Furthermore, "several" policymakers from among the above group said the decision taken at the 21 September FOMC had been a "close call".

From the US central bank´s policy statement, it was already known that three of the FOMC´s ten members had voted for an immediate increase in rates.

However, while "some participants believed that it would be appropriate to raise the target range for the federal funds rate relatively soon if the labor market continued to improve and economic activity strengthened [...] some others preferred to wait for more convincing evidence that inflation was moving toward the Committee’s 2% objective. Some participants noted the importance of clearly communicating to the public the conditions that would warrant an increase in the policy rate."

For their part, Fed staffers believed the balance of risks to their forecasts for real GDP were "tilted to the downside, reflecting the staff’s assessment that both monetary and fiscal policy appeared to be better positioned to offset large positive shocks than adverse ones."

Staff also continued to see the risks to the forecast from developments abroad as "skewed to the downside"

"Consistent with the downside risks to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as tilted to the upside. The risks to the projection for inflation were still judged as weighted somewhat to the downside, partly reflecting the possibility that longer-term inflation expectations may have edged down."

"The hawks are still the minority, despite repeatedly warning that holding off hiking now raises the risks of bigger increases and unpredictable downside growth risks later, but it won't take much, we think, to tip the committee into a majority in favor of tightening: "Several members judged that it would be appropriate to increase the target range for the federal funds rate relatively soon if economic developments unfolded about as the Committee expected”. They just want a bit more data to be sure. We think they will have those data by the time of the Dec meeting," Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a research note sent to clients.

For Michael Gapen at Barclays Research: "Our base case remains for a December rate increase, but the FOMC minutes reveal widespread discord within the committee on a variety of issues. These divisions, plus the tendency of the incoming data to be positive, but with blemishes, means a rate hike in December is not a done deal by any means."

As of 2109 BST the yield on the benchmark 10 year US Treasury note was higher by one basis point at 1.77%.