Parsing The FOMC Minutes: Why A Rate Hike May Be Coming In 1H 2015

federal reserveEarlier today, the Federal Reserve released the minutes from their last meeting, sending the market into its typical tizzy. Initially the market was down on rate hike concerns, but moments later it was up on an expanding economy and improving labor market. Yep, Mr. Market is going to do what he’s going to do and let everyone else spin it for what they think is going on. But behind the speculation, the question surrounding a prospective rate hike is a worthy discussion. Moreover, is a rate hike a real possibility?

Well if the Fed is concerned about its credibility, I’d say yes. Here’s a sampling from the minutes of the Federal Open Market Committee (FOMC) release:

  • The Staff continued to project that Real GDP would expand at a faster pace in the second half of this year and over the next two years than in 2013.
  • Participants generally agreed that both the recent improvements in labor market conditions and the cumulative progress over the past year had been greater than anticipated and that labor market conditions had moved noticeably closer to those viewed as normal in the longer run.
  • [M]ost participants indicated that any change in their expectations for the appropriate timing of the first increase in the federal funds rate would depend on further information on the trajectories of economic activity, the labor market, and inflation.

Several folks have varying thoughts ranging from QE forever to Fed jawboning to a Fed rate hike. And perhaps some other words not meant for a PG audience. I shared my own thoughts on July 29th just before the release of Q2 GDP. In short, I wondered aloud if there was a Fed Agenda? And if so, I figured that we would probably get some ideas from the way they discussed and spun the GDP print (and other metrics) heading into Jackson Hole. Well, it sure seems like they are brightening up the economic forecast. Now, why would they do that?

Well I mentioned a simple theory regarding my thoughts on a coming rate hike:  The Fed is still out of bullets. And they need to put some back in the chamber.  Here’s a line from my July 29th post:

Sign up for our FREE newsletter
and receive our best trading ideas and research

[T]hey don’t have much margin for economic error 5 years into this cycle, sitting on a zero rate policy.

I would like to think that at some point the Fed wants/needs rates to be higher. Why? Because they need a cushion. When was the last time that we went into the latter half of an economic cycle with rates at 0.00% to 0.25%? Or into a recession already in a low rate environment? Ideally, central banks need levers to pull, if even for psychological purposes. And considering that The Fed blew all their stimulative bullets on the financial crisis, they are slowly (trying) to put some of them back in the chamber.

Just something to chew on as they begin to spin the economy in a positive light. Now I don’t think a rate hike is coming any time soon. But the Fed appears to be setting the stage for it. 1H of 2015 may be the target. Feel free to share your thoughts or begin a thread in the comments below.

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.