Federal Reserve prepares markets for December rate hike

The US central bank appeared to be paving the way for another interest rate increase in December at its last meeting three weeks ago.

Most market watchers had expected the Federal Reserve's open market committee (FOMC) to keep the main Fed funds rate on hold at 1.25% at the October/November meeting, but prepare the ground for a quarter point increase to 1.5% at its final meeting of the year next month.

Markets unsure

While it was not as clear cut as many had expected - including the markets, which had priced in a December hike - the balance of arguments on the FOMC appeared to put more emphasis on growth trajectory.

Markets, however, were not so sure as concerns remained about persistently below-target inflation and the dollar – already lower on the day – weakened further following the publication of the minutes.

Moderate growth

In their discussions on the economic situation if was noted that hurricanes in August and September had little impact on either growth or sentiment, with household spending expanding at a "moderate" pace, while the labour market continued to strengthen.

Janet Yellen, who will retire from the Board of Fed governors in February, chaired the Oct/Nov FOMC meeting: Federal Reserve

One of the most telling lines was that the board continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labour market conditions would strengthen somewhat further".

Inflation concerns

Inflation, they noted, would remain below the target rate of 2% in the near term, but would stabilise near 2% in the medium term. It would be important, it was agreed, "to monitor inflation developments closely".

Some members were concerned about persistently low inflation and that inflation expectations had been subdued.

This is likely to prompt consumers to become comfortable with low inflation and expect prices to remain soft, and so put off the purchase of big-ticket items in the belief they'll be able to buy them at the same price, or more cheaply, in the future.

Several other members, however, were "reasonably confident" that the economy and inflation would "evolve in coming months such that an additional firming would likely be appropriate in the near term".

Market reaction

Markets on Wednesday, however, were unsure. The dollar slipped 0.78% on a trade-weighted basis, but it had seen a steady decline during much of the trading session.

Against the pound, the dollar fell 0.59% to $1.3319, while losing 0.72% against the euro to €1.1823.