Investors locked on one word from the Federal Reserve’s minutes released Wednesday: Soon.
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Members of the Fed’s rate-setting Federal Open Market Committee were generally upbeat about the United States economy and labor market, but several said any slowdown in future hiring would augur against a near-term hike.
Hong Kong shares was the top gainer in Asia with a 1% rise, while a stronger yen, thanks to the Fed’s cautious outlook, pulled Japan’s Nikkei back 0.5%. This has likely pushed rate increase expectations to December. Traders assign roughly coin-flip odds to a Fed hike by year-end, according to futures prices compiled by Bloomberg.
That reinforced his comments on Wednesday suggesting the Fed could raise interest rates in September, given better economic data since its last meeting in July.
“The market has been Fed driven so far”. Still, it said it planned to monitor global economic threats and financial developments to ensure that they don’t slow the economy.
The Fed has been in the spotlight this week with comments from the likes of New York Fed President William Dudley and Atlanta Fed President Dennis Lockhart keeping a September rate hike in the mix.
“Judging from the overall tone of the minutes it would appear the reality is that a strong USA dollar, combined with weakening inflation gauges appears to be preventing the Fed from pulling the trigger”, said Michael Hewson, chief market analyst at CMC Markets. While the USA currency rose against most of its major peers, it lost ground after the Fed’s statement.
“With the Fed in no apparent hurry to lift rates – or should we say, not providing enough of a hat tip to the hawks – the lack of any inflationary smoking gun is the green light for a continuation of the carry trade”, Cameron Bagrie, chief economist in Wellington at ANZ Bank New Zealand Ltd., said in a client note. Dallas Fed president Robert Kaplan, however, saw limited room to manoeuvre on rate hikes.
The FOMC voted to leave its benchmark interest rate at 0.5% last month. A stronger dollar discourages gold buying by making the metal more expensive for holders of other currencies. “This does seem to be a noticeable change from the previous concern that the Fed may “overshoot” the inflation target”.
Investors are now looking to an annual meeting of central bankers from around the world in Jackson Hole, Wyoming, next week, at which Fed Chair Janet Yellen is expected to speak.
The minutes said “a couple” of officials had advocated a rate increase at the July meeting.
But Fed officials also noted the risks of waiting too long.
“The minutes contained more concrete indications that a consensus to raise rates is slowly building”, said Brian Dolan, head market strategist at Drivewealth in New Jersey.
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Although near-term concerns associated with Britain’s vote to leave the European Union had dwindled, officials mentioned other threats that needed to be closely monitored, including the possibility that growth in Britain and the European Union could be slower than expected.
