FOMC Minutes Confirm Rate Hike Imminent "To Preserve Credibility"

A lot has changed since the November 2nd FOMC statement - most notably the world has suddenly become awesome again. The relatively benign statement (and election result) has left rate-hike odds at 100% for December but comment from Fischer and Yellen since have hinted concerns at the need for Trump fiscal spend fest. The main risk going into the minutes was a dovish tilt for the future, tamping the current 'nothing can stop us now' attitude (and we note the dollar leaked lower into the release). But sure enough, The Fed confirmed a rate-hike was appropriate "relatively soon" and was "important to Fed credibility."

• *MOST FED OFFICIALS SAW RATE HIKE APPROPRIATE `RELATIVELY SOON'
• *MANY FED OFFICIALS SAW STABILITY RISKS IF JOB MKT OVERHEATED
• *SUBSTANTIAL MAJORITY FED OFFICIALS SAW RISKS ROUGHLY BALANCED
• *SOME OFFICIALS SAW DEC. HIKE IMPORTANT TO FED CREDIBILITY
• *FED OFFICIALS SEE RESERVE BALANCES STAYING LARGE FOR `A WHILE'

Since the Nov FOMC statement, gold and bonds have been crushed as oil and stocks soared...

(Click on image to enlarge)

Heading into the minutes, the market has zero expectations of a surprise in December...

(Click on image to enlarge)

And looking further out at Fed funds, a 28% chance of a March hike is priced in and that rises to 61% by June and an 88% chance of at least one hike in 2017.

(Click on image to enlarge)

There were the key excerpts:

Some Fed participants were worried that the economic expansion was at risk without rate hikes, and the Fed would be behind the curve on unemployment:

A few members were concerned that a sizable undershooting of the longer-run normal unemployment rate could necessitate a steep subsequent rise in policy rates, undermining the Committee’s prior communications about its expectations for a gradually rising policy rate or even posing risks to the economic expansion.

As a result, some Fed participants said that to "preserve credibility" a rate hike should occur at the next meeting:

Some participants noted that recent Committee communications were consistent with an increase in the target range for the federal funds rate in the near term or argued that to preserve credibility, such an increase hould occur at the next meeting.

Others were even more aggressive, and wanted a rate hike as soon as November:

A few participants advocated an increase at this meeting; they viewed recent economic developments as indicating that labor market conditions were at or close to those consistent with maximum employment and expected that recent progress toward the Committee’s inflation objective would continue, even with further gradual steps to remove monetary policy accommodation.

But most said it is best to wait for further evidence of inflation:

But a majority of members judged that the Committee should, for the time being, await some further evidence of progress toward its objectives of maximum employment and 2 percent inflation before increasing the target range for the federal funds rate. A few members emphasized that a cautious approach to removing accommodation was warranted given the proximity of policy rates to the effective lower bound, as the Committee had more scope to increase policy rates, if necessary, than to reduce them. Two members preferred to raise the target range for the federal funds rate by 25 basis points atthis meeting.

* * *

Full Statement: