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FOMC Minutes are released: Will the FED raise interest rates in December or is it folly
This has been a long time coming. The FOMC and the FED rates rise is not exactly a surprise or a ‘whodunnit’; no one should be out there wondering anything more than, “When? When are they going to finally do it and put us all out of our misery?”. As much as I and probably anybody else with a passing interest in US/World Economics, will be looking forward to finally coming towards the end of this saga, will they actually do it? What I mean is: will they actually, finally, just get on and raise the interest rates? Or am I likely to have to write or more aptly rewrite an article from earlier this year or even 2014, about what will happen if/when they do it, albeit with a smattering of credible up to date quips and sources? Jury’s out on that front.
What I can update you on is the following. The FOMC minutes for the last meeting were published yesterday at 7pm GMT. For those of you keen on reading the full document – here it is: FOMC Minutes. The minutes were a like for like summary of what has already been widely circulated, December is on or at least could potentially be on. In the minutes, the key bits were as follows:
In summary, the FOMC are keen to raise the interest rate by a basis of 25 points or by 0.25% but they aren’t in a hurry. They are keen to stress and they certainly reference it throughout the minutes that a raising of the interest rates will only be if the market conditions and environment continue to perform strongly and even then the members will have to be fully convinced it is worthwhile “Members generally agreed that, in light of some weaker-than-expected readings on measures of labor market conditions and in the absence of greater confidence about the inflation outlook, it would be prudent to wait for additional information…before initiating the process of policy normalization.”
Furthermore despite Yellen’s suggestive hawkish tones, the FOMC are keen to keep the wording quite specific and not to cause alarm, “a couple of members expressed concern that this wording change could be misinterpreted as signaling [sic] too strongly the expectation that the target range for the federal funds rate would be increased at the Committee’s next meeting.” Naturally the disclosure of a potential rates rise and then quite openly pointing to a rates rise in press conferences negates any quietly-quietly catchy monkey approach the FOMC intend.
Finally the FOMC minutes drew to a close by summarising what the increase is adjudged on and the range at which a marginal increase could occur: “While members differed in their assessment of the likelihood that incoming information will warrant an increase in the target range for the federal funds rate when the Committee meets in December, they agreed that, in making the decision, the Committee will evaluate progress toward its objectives, taking into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments”.
Verdict:- Albeit for me to be damning of the FOMC Minutes and the committee, for one thing they are in a high pressure position with much of the world watching. Having said that, the process in which the rates rise has been conducted, a never-ending yo-yo, with subsequent reaction by markets has been anything but smooth. The markets now see a higher probability of a rates rise in December and as such have reacted accordingly with major indexes posting big one-day gains. I do have a couple of reservations. Firstly, the FOMC have given themselves ‘a get out of Jail free-card’ – they won’t necessarily raise interest rates until all the members are fully convinced. They also are gambling on the fact that the strength of the dollar doesn’t impede the rest of the world, their main trading partners such as Japan (who have just tumbled back into recession for the fourth time) and US growth; none of these are a dead cert. Secondly, the 25 points basis increase is fairly nominal. My question is, although an interest rates rise gives assurance to investors that the economy is finally back on track – which obviously is a good thing – even for a gold dealer, I wonder why the markets think this is an excellent thing. If bond yields increase, giving guaranteed returns and likewise if cash investments have greater potential for investors, whilst providing a safe-haven, will there not be an exodus from riskier assets such as the stock market in the medium to long term? Lastly, the strength of the dollar is cited frequently in the minutes as a concern. By raising the interest rates sooner than necessary, the dollar is only going to rocket further to the detriment of global trade and trade partners.
I for one am not ruling out a rates rise, I think it is a possibility. But like passengers stranded on the Titanic, the rest of the world will sullenly watch the US disappear into the distance on their empty lifeboat alone, choosing to take no one with them.
Article by Michael Cooper