Divided in their views over the labour market, most Federal Reserve officials last month ultimately listened to Chair Janet Yellen's argument for holding off on a rate hike, for now.
"A growing number of committee members are pulling in the direction of hiking, so it's becoming increasingly harder for Yellen to hold them back," said Roberto Perli, partner at Cornerstone Macro LLC in Washington and a former Fed economist.
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At their September 20-21 session, the Federal Open Market Committee voted 7-3 to leave interest rates unchanged. Minutes released Wednesday showed "several" of those who supported the decision to wait on tightening policy said the decision was a "close call." Several also indicated it would be appropriate to raise rates "relatively soon."
Following the minutes' release, investors continued to see about a two-thirds chance of a rate increase in December, based on prices in federal funds futures contracts. They assigned a 17 per cent chance to a move in November, when the Fed meets a week before the US presidential election.
Investors will get a chance to hear directly from Yellen on Friday when she speaks at a Boston Fed conference. The official title of her remarks is "Macroeconomic Research After the Crisis," which leaves open the question of whether she will comment on the outlook for the economy and monetary policy.
The record of the September FOMC meeting revealed a sharp debate over the potential impact of keeping rates ultra-low on the labour market and inflation. One camp warned this risked driving unemployment too low, possibly triggering much higher inflation and forcing the Fed to raise rates more drastically, a tack that has historically led to a recession.
An opposing group argued that more slack remains for the labour market outside the official measure of unemployment. Holding off on an increase, they claimed, could help draw people who had previously given up looking for jobs back into the work force. That would allow for continued job growth without a surge in wages and inflation. Thomas Costerg, senior US economist at Standard Chartered Bank in New York, said the latter camp can point to the fact that through most of 2016, measures of unemployment remained essentially flat and the participation rate modestly climbed, even as the economy added jobs at a healthy clip. The participation rate is the proportion of working-age people employed or actively looking for jobs. "The biggest surprise recently is this increase in the labor force participation rate," Costerg said. "The doves say: 'Look, there's more running room there.' And I think the hawks are a bit disoriented and don't know what to do, how to interpret this."
It also helped the doves that they had Yellen in their corner. The argument against a hike laid out in the minutes echoed Yellen's comments at her September 21 press conference following the FOMC meeting. She stressed that recent steadiness in labor force participation suggested the job market recovery has room to run.
"That argument is prominent in these minutes," said Michael Feroli, chief US economist at JPMorgan Chase & Co in New York. "It does feel like it has her fingerprints on it."
Reuters
