September FOMC minutes: Delay was not a “close” call

Since the September FOMC meeting, a number of FOMC participants have declared that the decision to not raise rates was "close." The minutes do not justify this interpretation of the meeting. Most participants agreed that, while domestic activity was expanding moderately, the risks to US economic growth had risen. This sentiment was reflected in the discussion of the policy decision. 

The committee noted that "because of the risks to the outlook for economic activity and inflation [arising from developments abroad], the Committee decided that it was prudent to wait for additional information confirming that the economic outlook had not deteriorated and that inflation would gradually move up toward 2 percent over the medium term." In the event, these risks were of sufficient magnitude to a sufficient number of participants to warrant an additional risk sentence in the statement itself: "Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term." There is nothing in the minutes that seemed to call for a September move.

Overall, the minutes present a view of a committee that was split between those participants who saw conditions as warranting a rate hike by the end of this year [not at the September meeting] and those who said that "although the time for normalization might be near, it would be appropriate to wait for information ... confirming that the outlook for economic growth had not deteriorated significantly." The split between these two camps in the FOMC seems to arise from genuine differences of opinion on how much to weigh economic activity and how much to weigh inflation when deciding on the appropriate policy path.

The minutes also reveal growing concerns amongst a sizable subset of the committee over the stability of inflation expectations. Some participants were concerned that downside risks to inflation could be realized (i.e., inflation expectations could become unanchored) if the committee raised rates before it was clear that economic growth would remain at an above-trend pace. These members went so far as to question the long-term credibility of the committee if after a "premature tightening" inflation remained below the committee's 2% target. Until Chair Yellen's speech on September 24, we were not aware that this was a predominant concern of the committee. Of course, in the split nature of the today's FOMC, this concern was balanced by some other participants who expressed fear that delaying the start of normalization would risk an undesired buildup in inflationary pressures and/or increase financial stability risks.

In addition, the minutes reflected more dissent over the cumulative improvements in labor markets than it was anticipated and more than observed in the past. A few members noted that underutilization in labor markets had been eliminated but some others believed that further progress was possible before labor market conditions would be consistent with the committees' mandate of full employment.

"We maintain our call for the first rate hike in March 2016. We believe that the recent data flow on prices, trade, and jobs all tilt in favor of the first rate hike occurring next year rather than in December. We maintain our conviction that, at the end of the day, the outlook for inflation will stay the FOMC's hand this year and that they will wait for further evidence of tightness in labor markets and improvements in the inflation outlook before raising rates", notes Barclays.