Fed minutes confirm December hike expectations

“It was noted as well that the longer-run normal level to which the nominal fed funds rate might be expected to converge…would likely be lower than in previous decades reflecting a slower rate of potential growth”.

As such, “Dec. 16 is a very live date for action and, frankly, given the stellar 271,000 jobs report since the October meeting, we would be astounded if they don’t raise rates finally”, says Chris Rupkey, chief financial economist at MUFG Union Bank in NY. Borrowing costs have started to rise, and Fed officials appear to be encouraging the solidification of those expectations.

A chorus of Fed officials also backed investors’ expectations of a rate rise, with Fed President Dennis Lockhart, New York Fed President William Dudley and Cleveland Fed President Loretta Mester all expressing confidence that the policy tightening, when it comes, will be implemented smoothly for markets. The greenback gained about 6.1 per cent since the October meeting on the prospect of the US’s zero interest rate policy coming to an end, and some investors took the opportunity to cash in those gains after the minutes stuck to the official statement last month.

Joshua Mahony, market analyst at IG, said, “The Fed struck a particularly hawkish tone in the minutes released yesterday, providing markets with a strong degree of certainty that we will see a hike in December”.

The outlook for a USA rate hike boosted the dollar, although the euro rebounded to 1.0729 after hitting a seven-month low at 1.0617 on Wednesday.

The stock market’s message for Janet Yellen has been that slow and steady on interest rates is preferable to fast and furious.

A delay in the move may add to the uncertainty in financial markets that have for a while counting each word that indicates a change in the interest rates.

But inflation remains much weaker than the Fed wants to see, and signs of consumer spending strength going into the year-end holiday season have been mixed. Fed officials were encouraged by the “solid pace” of consumer spending in the third quarter and generally expected further moderate gains in coming months, according to the minutes. “They re-iterated the gradual pace of future rate moves, and this has led to some profit-taking in the dollar”, senior currency strategist at Rabobank, Jane Foley told CNBC. But next month the Fed might get its goldilocks reaction from the financial markets. “If that is the case, the risk is to further weakening of the dollar”.