The two leading questions surrounding an interest rate hike are “Whether it will happen” and “When will it happen” and while the answer to the first is a resounding “yes, there will be a rate hike”, there is far less certainty about the timing of the impending increase.
The minutes of the last meeting of the Federal Open Market Committee, FOMC, on July 28 and 29, which were released on Wednesday, indicate that a majority of the Fed officials expressed the view that the conditions for the “when” question are “approaching”, making a September move a possibility.
According to the minutes, “Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point.”
Amherst Pierpont’s chief economist Stephen Stanley said, “This is far more explicit of a smoking gun than I was expecting to see.”
Bloomberg, who inadvertently released a headline on the minutes almost half an hour before the release time embargo set by the Fed, quoting from the minutes, reported, “Almost all the members” indicated that “they would need to see more evidence that economic growth was sufficiently strong and labor market conditions had firmed enough for them to feel reasonably confident that inflation would return to the Committee’s longer-run objective over the medium term.”
Investor reaction to the news resulted in a reduction of the probability that the Fed would tighten next month to 38%, using federal funds futures contracts as a basis, at around 2.30 PM EST on Wednesday, in comparison with a 50% reading earlier in the day.
Expressing a more bearish view on a September rate hike, Guy LeBas, managing director at Philadelphia based Janney Montgomery Scott LLC said, “My immediate reaction is that it should reduce the possibility of a September rate hike a little bit. The biggest point to me is that there’s no evidence of confidence in rising inflation.”
The minutes also indicate that the meeting raised the question of what was required to move inflation closer to their 2% target. The rising demand for labor indicated in the numbers which “still appeared not to have led to a broad based firming of wage increases,” was the opinion expressed.
On the markets, the effect of the continuing drop in oil futures pushed energy stocks down sharply with the S&P 500 index (SPX, -0.83%) closing 17.31 points or 0.8% down as eight of its 10 sectors finished the day showing losses. The important index briefly dropped below its 200-day moving average, which many analysts see as an important technical level that indicates a bear market when it is breached.
While the Fed has made it abundantly clear that it would prefer to hike the interest rate this year, two camps have developed among Fed watchers. Many of them think that the increase will happen in September, while others present the view that the low inflation rate would result in a delay until December.