FOMC Minutes Signal Rate Hikes

Federal Open Market Committee (FOMC) recent minutes suggest that members, having "significant concerns about the upside risk to inflation," are likely to move toward a hike in rates as the next Fed policy move. However, the committee appears to be in conflicted discussion on what the data really means and timing of any policy decisions.

FOMC Balances Multiple Challenges

FOMC members continue to be fixed in a conundrum between inflation and economic growth--making the course and timing unclear.

Headline inflation, driven by increases in food and energy prices, continues to climb. Meanwhile, labor markets began to soften, industrial production declined, and business and consumer spending begin subsiding as well. Leaving the FOMC with this double edged sword of rising inflation and weakening economy.

Juggling a multitude of confusing economic indicators and counteracting data the FOMC members aren't presented with easy solutions.

Inflation Seems the Largest Risk

Members do seem to be at a consensus that inflation is the bigger risk and most likely to be addressed by the FOMC. The recent minutes reflect the sentiment that "although downside risks to growth remained, they appeared to have diminished somewhat, and the upside risks to inflation and inflation expectations increased."

This consensus is likely to motivate the Fed to raise rates as the next policy move. The question becomes, when? A questions that appears to have gotten a fair amount of internal debate.

FOMC Internal Discussions Split

The debate arises in interpreting the significance of the inflation risk. "Some viewed the upside risks to inflation as having diminished modestly over the intermeeting period," citing drops in oil and some commodities. Yet, in counterpoint, "others viewed these risks as having increased."

The FOMC inflation hawks, Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher, who have been notably vocal during the intermeeting period are certainly the ones making the case for more concern. The FOMC minutes reflect this side as citing elevated headline inflation, low level of real federal funds rate, and evidence that businesses are passing through increased cost to consumers as evidence for more concern.

Market Liquidity Fear Subsiding

As the committee debated the significance of inflationary risk, they seem satisfied with efforts to heal the housing and mortgage market.

Concerns were acknowledged over the stresses on Fannie Mae and Freddie Mac as well as the increased cost of capital to strengthen bank balance sheets. However, new legislation passed to provide a safety net to these firms and the continued rise in bank lending appeared to evidence to the FOMC that the adverse effect may be managed.

FOMC Minute Conclude with Caution

The FOMC closed the meeting with a general summary of caution, saying "although members generally anticipated that the next policy move would likely be a tightening, the time and extent of any change in policy stance would depend on evolving economic and financial developments and the implications for the outlook for economic growth and inflation."