Fed Keeps September Rate Hike On Table

The Fed released the minutes from its July meeting today and the biggest takeaway was that the committee believed that “developments during the intermeeting period as reducing near-term uncertainty along two dimensions discussed at the June meeting”. Those two areas of uncertainty related to the risk of contagion from Brexit and worries about the strength of the labor market. Subsequent data has shown weak reports on inflation and retail sales but they were offset by stronger gains in industrial output and home building activity. William Dudley, president of the FRB of New York, came out on Tuesday and clearly put a September rate hike within the realm of possibility, citing the improving labor market and wage growth. Despite what Dudley says, I think that the majority on the FOMC still would like to see a few more data points, especially some real indication that the inflation rate was actually close to or even exceeding its 2% target before they actually raise rates. The Fed has been burned too many times by signaling a rate hike only to be burned by weak economic reports. The December rate hike last year was a disaster and the weak unemployment report in May killed the expected rate hike in June. I’m not sure they want to risk their credibility a third time without being absolutely sure that it is not too early.

As critics constantly point out, the Fed certainly has plenty of room to raise rates if the economy really does start to run too hot. Yet their continual focus on tamping down the economy at the first sign of wage growth, even as inflation remains benign, has always been unfathomable. It is not the 1970s anymore. But there is always a faction within the Fed that continues to act like it is.