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Market Commentary

Will the Fed Move Rates Higher in December?

Posted on August 17, 2017

The FOMC minutes were released yesterday and the commentary did not rattle the markets much. It is clear the FOMC members are questioning their inflation forecasting, as members "differed in their assessments of whether inflation expectations were well anchored". And if inflation pressures don't materialize, another rate increase in December may not happen.

Good morning!

  • • The FOMC minutes were released yesterday
    • o Federal officials that were meeting in July split over the timing of future interest rate increases as they struggled to understand why inflation has been so weak in recent months
    • o But they agreed to soon begin the year long process of drawing down the central bank's holdings
    • o Some highlights from the minutes:
      • "Many participants, however, saw some likelihood that inflation might remain below 2 percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside."
      • "Many participants noted that much of the recent decline in inflation had probably reflected idiosyncratic factors."
      • "Most participants indicated that they expected inflation to pick up over the next couple of years from its current low level and to stabilize around the Committee's 2 percent objective over the medium term."
      • • The minutes said "several" participants wanted to announce a balance sheet plan at the current meeting but "most preferred to defer that decision until an upcoming meeting"…most analysts read this as September
      • • Some participants stressed that there was room to be patient on monetary policy, while "some others" were more worried about the risk from a labor market that had already reached full employment, and that a delay could lead to "an intensification of financial stability risks"
      • A key statement was this: "Most observed that the Committee could afford to be patient under current circumstances in deciding when to increase the federal funds rate further and argued against additional adjustments until incoming information confirmed that the recent low readings on inflation were not likely to persist and that inflation was more clearly on a path toward the Committee's symmetric 2 percent objective over the medium term."
        • • This says to me a December hike may be moving off the table unless inflation surprises on the upside in the coming months…and I don't see that happening
  • • Fed's Mester (she is currently a non-voter) told Reuters that she is not convinced that softer inflation of late should deter the FOMC from continuing the remove accommodation
  • Housing starts fell 4.8% in July to a 1155k annual rate, well behind what had been anticipated
    • o Building permits, which can serve as indicators of future construction, also fell by 4.1% from June levels to 1223k
      • • This may not be as concerning, as permits for the prior month were revised higher from 1254k to 1275k
    • o Most of the drop in housing starts occurred in the multifamily sector (5+ units) that fell by 17.1% although single family homes also fell by 0.5%
    • o Regionally, the largest declines occurred in the Northeast and Midwest with starts dropping by 15.7% and 15.2%, while in the West they fell by only 1.6% and in the South they eked out a 0.6% gain
  • On the fiscal side, President Trump's Manufacturing Council and Strategy and Policy Forum both disbanded yesterday, more from the fallout from the President's comments regarding the events in Charlottesville
    • o I only mention this because the markets are more concerned about this than the FOMC minutes and moved lower again during the day
    • o Some are starting to worry about when Congress gets back from recess and how the agenda moves forward
  • • Today we get initial jobless claims
  • • In other news:
  • • Oil and gold both off very little this morning
    • US weekly crude oil inventories fell 8.94mn barrels in the week of August 11th, well above the listed Bloomberg consensus of -3mn barrels
    • The contraction marks seven consecutive weeks of inventory drawdown
  • • Treasuries
    • o 2-yr: 1.33%
    • o 10-yr: 2.24%
    • o 30-yr: 2.82%
  • • LIBOR
    • o 1-month: 1.23%
    • o 3-month: 1.32%
  • • Fed funds effective was 1.16%

Have a terrific Thursday!!!


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