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Fed minutes reveal low inflation numbers could be long-term, but rate hike still likely

Officials still plan to raise rates

The Federal Reserve released its minutes Wednesday from its September meeting, which showed officials believe low inflation may not go away anytime soon.

During its meeting, the Fed elected to hold off on a rate hike, but announced its quantitative un-easing will officially begin in October.

Now, minutes showed several members of the Federal Open Markets Committee rose their concern over persistently low inflation rates during the meeting.

“Several expressed concern that the persistence of low rates of inflation might imply that the underlying trend was running below 2%, risking a decline in inflation expectations,” the minutes stated. “If so, the appropriate policy path should take into account the need to bolster inflation expectations in order to ensure that inflation returned to 2% and to prevent erosion in the credibility of the Committee’s objective.”

Fed members also noted that the persistence of low inflation might result in the federal funds rate staying uncomfortably close to its effective lower bound.

But despite this concern over inflation, many Fed members are still anticipating voting for a rate hike in December.

“Consistent with the expectation that a gradual rise in the federal funds rate would be appropriate, many participants thought that another increase in the target range later this year was likely to be warranted if the medium term outlook remained broadly unchanged,” the minutes reported.

But this inconsistency is confusing at best, and perhaps even concerning. One expert explained the inconsistency, according to an article by Akin Oyedele for Business Insider.

From the article:

“These Fed minutes are confusing and inconsistent,” Torsten Slok, Deutsche Bank's chief international economist, said in a note.

“On the one hand, they argue that the slowdown in inflation may be more permanent,” he continued. “On the other hand, the minutes argue that more rate hikes are needed and coming. The Fed is relying on their PhD economics inflation models, but several FOMC members, including Evans today and Bullard and Kashhari previously, are starting to question if raising rates in December is a good idea.”

Indeed some Fed members did insist economic data would need to depict an upward movement for the inflation rate if they were to vote for a December rate hike.

“Several others noted that, in light of the uncertainty around their outlook for inflation, their decision on whether to take such a policy action would depend importantly on whether the economic data in coming months increased their confidence that inflation was moving up toward the Committee’s objective,” the minutes stated.

But economists continue to predict an increase in economic growth, making a rate hike more and more likely in December. The International Monetary Fund increased its worldwide growth forecast to 3.6% this year and 3.7% next year. This is up 0.1 percentage point each year from its last forecast in July.

As the U.S. continues to recovery from the financial crisis of 2007 through 2009, IMF Chief Economist Maurice Obstfeld encouraged policy makers to take action, according to an article by Josh Zumbrun for The Wall Street Journal.

From the article:

“Policy makers should seize the moment: the recovery is still incomplete in important respects, and the window for action the current cyclical upswing offers will not be open forever,” Mr. Obstfeld said.

Last week, Philadelphia Fed President Patrick Harker explained that he penciled in a third rate hike for 2017 in his calendar.

And due to the strong wage growth seen in the last jobs report, traders are forecasting a 90% chance of a rake hike at the Fed’s December meeting, according to the CME Group’s FedWatch tool.

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