In comments on Tuesday, New York Fed Governor Dudley stated that a rate increase in September was possible and that markets were complacent over tightening risks. This implied traders saw a 47 percent chance the central bank would raise rates at its December 13-14 meeting, down from 58 percent shortly before the release of the minutes, according to CME Group’s FedWatch program.
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“I don’t think anything in these minutes supports a quicker rate increase and again, I think that they’re data dependent still”, said Chris Gaffney, president of Everbank World Markets in St. Louis.
Therefore, while July’s FOMC meeting minutes contained some hints of hawkishness, the Fed’s continued lack of clarity and consensus were evident. This revelation gave some inkling that the Fed may at least be more divided when it comes to members’ opinions on near-term rate hikes, and perhaps not as dovish-leaning as it has been portrayed to be in the past few months.
With reported inflation still very low, dovish elements within the committee want to keep rates at extremely low levels in an attempt to push employment numbers even higher.
The optimistic chatter is a shift from the Fed’s messages earlier this year.
The crucial question now is the thought process of Chair Yellen and core committee members surrounding her. Many experts took that to mean the Fed wouldn’t raise rates anytime soon. St. Louis Fed President James Bullard spoke Wednesday and he sees little, if any, change to the Fed’s key interest rate because returns on USA bonds are so low and workers’ productivity isn’t growing quickly.
Investors will be paying close attention to a speech that Yellen will give on August 26 to an annual conference of central bankers in Jackson Hole, Wyoming, for any further clues about the Fed’s timetable for a rate hike.
They believe there’s a 45% chance of a rate hike in December, up from 35% last Friday, according to CME Group.
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In December past year, the Fed raised its benchmark lending rate from a record low near zero, where it had stood since the depths of the 2008 financial crisis. Dudley said he thought that solid job growth would continue and that the sluggish pace of the US economy would pick up. Weak economic growth, market volatility and falling oil prices in the winter have held the Fed back.
