Fed minutes raise expectations for December hike

WASHINGTON – Federal Reserve officials earlier this month believed it would be appropriate to raise a key interest rate “relatively soon,” with some arguing for a hike at the Fed’s next meeting in December in order to preserve the Fed’s credibility.

Minutes of the Nov. 1-2 meeting released Wednesday show that Fed officials were moving closer to hiking rates for the first time in nearly a year. Some officials argued that if the Fed did not raise rates at its December meeting, it ran the risk of harming the central bank’s credibility given the many signals it had sent about an impending hike.

Private economists who widely expect the Fed will boost its benchmark rate by a quarter-point at its Dec. 13-14 meeting said there was nothing in the minutes to change their forecast.

“The Fed meeting minutes say that the case for a rate hike keeps on getting stronger and stronger,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York. “A rate hike is coming in December.”

Rupkey and other analysts said the open question is how many further hikes will occur in 2017. Many analysts said they were still looking for just two hikes next year. But others said the Fed might make three hikes if President-elect Donald Trump succeeds in pushing a big tax cut package and infrastructure bill through Congress.

“Fiscal stimulus under the Trump administration could lead to stronger growth in output and prices, prompting the Fed to tighten policy more rapidly going forward,” said Sara Johnson, an economist with Global Insight.

At the November meeting, the central bank left its benchmark rate unchanged in a range of 0.25 per cent to 0.5 per cent, where it has been all year. There had been little expectation of a rate hike then. Economists believed that the Fed would not want to risk destabilizing financial markets with a rate hike just before voters went to the polls.

The decision was approved on an 8-2 vote. Federal Reserve bank presidents Esther George of Kansas City and Loretta Mester of Cleveland dissented because they favoured an immediate rate hike.

The minutes, which were released with the customary three week delay from the meeting, gave no indication that officials discussed the presidential election. In the policy statement released after the meeting, the Fed dropped hints that it was moving closer to a decision to raise rates at its December meeting.

While the Fed’s discussions occurred before the election of Trump as president, Fed Chair Janet Yellen indicated last week that the election has not changed Fed thinking on the timing of the next rate hike. Yellen told the Joint Economic Committee that the case for a rate increase has “continued to strengthen and that such an increase could well become appropriate relatively soon.”

The CME Group’s FedWatch barometer, which tracks investors’ moves in the futures market, puts the probability of a hike in December at 93.5 per cent.

The Fed increased its benchmark rate, the federal funds rate, by a quarter-point last December, the first increase in the rate in seven years. At the time, it projected that it would hike the rate another four times in 2016. But a significant slowdown in U.S. growth in the first half of the year, as well as global weakness and periodic bouts of financial market turbulence, has kept the central bank on the sidelines.

Private economists say forecasting the path of Fed rate hikes has gotten harder given the uncertainty after Trump’s election. Republicans now control the White House and both the House and Senate, raising the chances that the new president will be able to enact at least portions of his economic proposals.

Already, financial markets have pushed up long-term interest rates by about one-half percentage point. That move reflects investors’ expectation that a program of tax cuts and increased spending on infrastructure projects will boost economic growth, putting upward pressure on interest rates.