U.S. Federal Reserve officials believed last month that the economic conditions needed to trigger the first interest rate hike in nearly a decade could “well be met” by the FOMC’s next meeting in December.
Minutes of the October discussions reveal Fed officials’ overall view is that the job market will improve further and that inflation will begin to move toward the 2% annual target.
The Fed also took note of the U.S. economy’s resilience through a summer of financial market turbulence. It felt that global threats had “diminished” at the time of the meeting.
The Fed has kept its benchmark for short-term rates near zero since late 2008. But, the wording in the October statement marked the first time in seven years of ultra-low rates that Fed had ever suggested that it might raise rates at its next meeting.
The minutes also show that Fed officials had debated whether to insert the “next meeting” phrase into the statement. A couple of officials worried that it might be signaling too strongly the possibility of a December rate hike.
However, most members felt the new wording would underscore that they had not made a decision on a rate hike but that “it may well become appropriate” to start raising rates in December if the data show the economy performing as expected.
The October meeting came after a disappointing September jobs report, which was noted in the minutes. But since then, the job market surged in October, with employers adding 271,000 jobs, the most this year.
As such, “Dec. 16 is a very live date for action and, frankly, given the stellar 271,000 jobs report since the October meeting, we would be astounded if they don’t raise rates finally,” says Chris Rupkey, chief financial economist at MUFG Union Bank in New York.
Further, in recent weeks, a number of Fed speakers have said that a rate hike in December was on the table: in congressional testimony on November 4, Yellen called a December rate hike a live possibility if the economy stays on track; and William Dudley, president of the Fed’s New York regional bank, seconded that view in a separate appearance that same day.
Then, in a speech last week, Loretta Mester, president of the Fed’s regional bank in Cleveland, said that she believed the time to hike rates was quickly approaching. She argued that waiting too long to begin raising rates could allow inflation to take hold.
Jeffrey Lacker, president of the Fed’s Richmond bank, said in a CNBC interview on Wednesday that he has not changed his view that the central bank needs to start raising rates. Lacker cast the lone dissenting vote at the October and September meetings, arguing in favour of rate hikes at both of those meetings.