The minutes from the September FOMC meeting are likely to reveal a heated debate about the appropriate course of policy. There were three FOMC officials – Kansas City's George, Boston's Rosengren and Cleveland's Mester – who dissented in favor of a rate hike at the meeting. At the other end of the spectrum, there were three FOMC officials who became more dovish, penciling in no hikes for this year. We think this divide reflects views around the costs/benefits of the Fed's accommodative policy. The three hawkish dissents were motivated, in part, by the belief that there are growing costs of easy policy including a misallocation of capital and potential brewing of asset bubbles. We therefore expect the minutes to reveal a discussion about the costs and benefits of keeping rates at the current low levels.
We also think the minutes will show a conversation about the degree of labor market slack. Fed Chair Yellen mentioned that the committee believes that there might be more slack in the labor market given the recent rise in the labor force participation rate and stagnant wage inflation. This would be a reason for a slow and delayed cycle.
Fed officials likely also discussed concern over low productivity growth and a structural shift lower in the equilibrium Fed Funds rate. Remember that the Summary of Economic Projections (SEP) revealed a decline in the long-run dot to 2.875% from 3.0% showing a more broad-based acceptance of lower long-run rates. This went hand-in-hand with a decline in trend GDP growth to 1.8% from 2.0%. The shift lower in equilibrium rates would also dictate a more shallow hiking cycle.
Overall, the minutes will provide something for everyone and reveal the growing divergence of views within the committee.
Copyright © 2016 BofAML, eFXnews™Original Article
