Counting Down the Minutes

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Core and headline inflation remain subdued with the Fed’s preferred measure of inflation, Core PCE, remaining slightly below target.

The FOMC released the minutes of the September 19-20th meeting this afternoon. Participants worried that forces keeping inflation down could be more persistent than previously thought, departing from comments earlier in the year regarding the influences of one-time factors such as cellphone plans being more transitory. The bulk of the committee still see a December interest rate hike as appropriate, however some remain data dependent. Participants acknowledged that upcoming inflation and growth data could be influenced by the effects of the recent hurricanes, but don’t see the storms affecting medium or long term growth. Some participants also questioned whether the estimate for the natural rate of employment is lower, implying more slack in labor markets.
Market responses to the minutes' release were muted, with 10-year yields falling 1 basis point and the expectations for a December interest rate hike staying put at 77%. The effects of the hurricanes will allow the committee to look through at least a few data points as hurricane-influenced, and we share the market’s view that there will be a hike in December. If lower than target inflation indeed persists and there is slack remaining in the labor market, the FOMC should move slower in normalizing policy and risk assets should benefit. Please see page 59 of the Global Perspectives™ Book: “Inflation - Consumer Price Index”. - Special Guest Blogger: Pavel Dekhman

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