The minutes of the Federal Reserve interest-rate meeting held on 26th September, published yesterday evening, reveal that the Fed’s top echelons have had an animated debate about whether to respond to solid growth momentum by raising key rates temporarily above the neutral fed funds rate. A number of FOMC members turn out to be advocating a temporary shift to a restrictive monetary-policy stance. Some of the other monetary custodians opposed such a move, arguing that the economy was not showing any signs of overheating and that a clear upward shift in inflation rates was not to be detected. Regardless of the monetary-policy target level at which the Fed will ultimately take aim, members of the Fed’s top policymaking committee agreed that further moderate key-rate hikes were called for in the coming months. Furthermore, the transcript offers a more precise explanation of why the sentence indicating that “the stance of monetary policy remains accommodative“ is being removed from the FOMC statement long before the target range for the federal funds rate gets up close to a neutral policy rate. Delaying this decision would have left market participants being lulled into a false sense of security that the Fed knew exactly when its monetary-policy stance was no longer accommodative.
The markets continue to be more cautious than the monetary authorities
All things considered, the latest Fed minutes have to be classified as hawkish. Fed funds futures currently imply that market participants have not, as yet, been expecting key rates to be hiked into the restrictive range, instead anticipating that the current rate-hiking cycle will come to an end in the vicinity of 2.90%. The new set of minutes calls such expectations into question. At the same time, the new minutes have given rise to apprehensions among some market participants that the Fed could act too aggressively and therefore put a brake on cyclical momentum or even provoke a recession – a risk scenario which is presumably going to move the markets on more than one occasion.
The economy’s solid growth momentum suggests that further rate hikes are in the offing
It is not just that the economy is currently on a very favourable path in the United States; inflation rates are also close to the Fed’s target while the unemployment rate has moved down to the lowest level since 1969. In consequence, the cyclical development unambiguously suggests that ongoing tightening of the monetary reins is called for. We see the fed funds target rate standing at 3.25% towards the end of next year, and think that the rate-hiking cycle will come to an end at 3.50% at the beginning of 2020. In our assessment, such a key-rate level would not, by any means, mean that the Fed was hitting the monetary brakes hard to the detriment of economic momentum.