September Fed rate hike 'unlikely'

Minutes of US central bank's meeting show policymakers waffling on timing of increase

NEW YORK • So much for September. Traders gearing up for the Federal Reserve to raise interest rates next month reversed course on Wednesday after minutes from the United States central bank's July meeting showed policymakers were still waffling on whether the economy is strong enough to warrant higher borrowing costs.

That is far short of the confidence they expected to see from a central bank supposedly just weeks away from what would be the first rate increase in almost a decade.

The probability that futures traders assign to a rate boost next month slid to 36 per cent, the lowest since last month, from about 50 per cent earlier in the day.

The levels assume that the Fed's target will average 0.375 per cent after the first move.

The chance of an increase at or before the Fed's December meeting dropped as well, to 65 per cent from 73 per cent on Tuesday.


I'm a bit surprised by the market reacting as much as that. I think the message was 'we're getting closer to hiking but we're not there yet'. Certainly, there is no clear signal of a rate hike in September and that's what is hurting the dollar.


Fed officials were divided about whether the US economy is strong enough to withstand an interest rate increase at the July 28-29 policy meeting.

Although policymakers at the Federal Open Market Committee (FOMC) meeting viewed conditions getting closer to allowing the first rate hike in nearly nine years, they cited evidence that the time was not ripe.

As expected, the FOMC left unchanged the benchmark federal funds rate at the zero level, where it has been pegged since late 2008 to support the US economy's recovery from the Great Recession.

But Fed chairman Janet Yellen has signalled that a hike is on track this year.

The minutes of the FOMC meeting gave no clear sign of when the Fed will pull the rate trigger.

"In our view, the minutes have lowered the probability of lift-off in September and raised the probability for December," Nomura Global Economics said in a client note.

"It's clear... that the committee sees downside risk to its inflation outlook and it may need more evidence that inflation is moving in the right direction."

Moody's Analytics analyst Ryan Sweet said the minutes confirmed that a rate hike at the Sept 16-17 meeting remained possible, but was "not a slam dunk, and we believe the odds have diminished over the past couple of weeks".

FOMC participants highlighted tepid inflation, slack in the job market and low wage growth, as well as risks from China's economic slowdown as they considered raising near-zero borrowing costs.

"Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point," the minutes said.

Some FOMC participants emphasised that the economy had made "significant progress" and viewed conditions for a rate hike "as having been met or were confident that they would be met shortly".

A couple of them were worried that an appreciable delay in hiking the rate would result in an "undesirable increase in inflation" or hurt financial stability, while one member was ready to pull the trigger but would wait for additional data.

Officials generally agreed that job market conditions had improved. But several noted that "some noticeable margins of slack remained", including a high share of employees working part time because full- time jobs were not available.

Some of the participants said they did not have enough data to make them "reasonably confident" that tepid inflation would move back to the Fed's 2 per cent target over the medium term, a key element of the central bank's dual mandate of price stability and maximum employment.

"Members are satisfied with improvements in the labour market, but it is inflation that has members leaning one way or the other," said economist Patrick Newport at IHS Global Insight.

"That's probably because the inflation numbers are a puzzle. The economy is nearing full employment, productivity has stalled, yet inflation shows no signs of taking off," he said.

Earlier on Wednesday, the Labour Department reported that consumer prices rose a mere 0.2 per cent in July year on year, extending a slow rise since April.

China's slowdown also troubled Fed policymakers.

"While the recent Chinese stock market decline seemed to have had limited implications to date for the growth outlook in China, several participants noted that a material slowdown in Chinese economic activity could pose risks to the US economic outlook," the minutes said.

The FOMC meeting came before China's shock devaluation last week of the yuan, which many observers saw as a sign that its slowdown is deeper than thought.

The dovish FOMC minutes sent the US dollar tumbling, ending the day down 0.8 per cent at US$1.1121 to the euro.

"I'm a bit surprised by the market reacting as much as that," said Mr Vassili Serebriakov of BNP Paribas. "I think the message was 'we're getting closer to hiking but we're not there yet'.

"Certainly, there is no clear signal of a rate hike in September and that's what is hurting the dollar," he added.


A version of this article appeared in the print edition of The Straits Times on August 21, 2015, with the headline 'September Fed rate hike 'unlikely''. Print Edition | Subscribe