Economic growth slowed, while worries about inflation turned into worries about deflation.
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While the October minutes reflected a stronger sense that December is the target date, they also showed a substantial level of disagreement about the path ahead.
Thirty-year Treasuries logged their first back-to-back weekly gains since August as the prospect that the Federal Reserve will raise interest rates next month and declining oil prices dimmed inflation prospects. The headline change for Non-Farm Payrolls came in at 271,000 versus 180,000 expected, Average Earnings was at 0.4% versus 0.2% expected, and the Unemployment Rate printed 5% versus 5.1% expected.
Then, in a speech last week, Loretta Mester, president of the Fed’s regional bank in Cleveland, said that she believed the time to hike rates was quickly approaching.
The Fed has good reasons to hike, Dr Oliver, the investment bank’s head of investment strategy and chief economist said.
“Fast sends a message to the market that we’re behind the curve”. The USD reaction was relatively muted with the dollar failing to extend on its recent rally, as the market was likely hoping for a more hawkish surprise.
There has not been an increase in the Fed’s interest rate since June 2006, before the beginning of the American financial crisis. But the October session saw central bankers grappling with longer-term issues that may be relevant to the pace of subsequent rate increases, including whether the USA economy’s lower long-term potential means low interest rates will become a permanent norm.
Ian Shepherdson of Pantheon Macroeconomics interpreted the record of the meeting as raising the likelihood of a December rate increase. The markets jumped Wednesday after the FOMC minutes signaled that the economy is strong enough to warrant a December rate hike.
The 1977 move was followed by progressively steeper rate increases that subsequently weighed on equities. The Fed has not raised rates in about a decade.
Investors are betting the next rate cycle will be less volatile.
“Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation, those conditions could well be met by the time of the next meeting”, according to minutes of the Fed’s October 27-28 meeting released on Wednesday.
Markets in London and Frankfurt were up 0.8 per cent and 1.1 per cent, respectively.
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Investors received fresh signs from the Federal Reserve’s policy-making group that the central bank is looking to raise interest rates at its December meeting and are now bracing for another move higher in the greenback.
