Fed remains stubbornly hawkish but some signs of FOMC division

(Alliance News) - Signs of division among Federal Reserve policymakers are beginning to show, analysts said following the release of the US central bank's latest meeting minutes late Wednesday.

The release of the minutes came after data showed producer price growth in the US quickened last month, and ahead of the crucial US consumer price index reading for September, which could shape Fed policy between now and the end of the year.

US policymakers are likely to press on with rate hikes in the short term, the minutes suggested.

In its September meeting, the Fed lifted interest rates by 75 basis points for the third time in a row. This took the target range for the federal funds rate to 3.00% to 3.25%.

Inflation has so far showed "little sign so far of abating", the minutes said.

There are "reasonable odds" of another 75 basis point rate hike in the November meeting, which would be its fourth three-quarter point hike in-a-row. The market-implied path suggests a strong chance of a 50 basis point hike in December, the Fed added.

That pair of hikes would take the federal funds rate range to 4.25% to 4.50% at year end. The past two votes have seen little sign of division among policymakers, with the motion for 75 basis point hikes getting a 12-0 majority in each of the July and September meetings.

However, there may be some internal disagreement brewing.

"The September [Federal Open Market Committee] minutes make it clear that further hefty rate increases are coming, but it is clear that views are not uniform within the FOMC; some members are more worried than others that the Fed could over-tighten," Pantheon Macroeconomics analyst Ian Shepherdson commented.

Shepherdson noted there was some divergence within the policy-making committee on the current assessment of the US labour market.

Some see evidence of it cooling, while others are seeing signs of a dreaded wage-price spiral.

Analysts at Deutsche Bank said recent comments from US monetary policymakers suggest an agreement on the mission - lowering inflation - but less of an accord "on tactics".

"There has been some evidence of mildly diverging views around the tactics of implementing policy. Some dovish leaning officials like Governor [Lael] Brainard emphasized the lags of monetary policy in impacting the economy and the potential risk of spillover amid global tightening. Brainard also noted a few signs of demand moderation, such as strong but decelerating wage growth, lower-than-expected excess saving, and her forecast of zero growth this year. In our view, her recent communications suggest she is likely in the camp for 100bps of rate increases for the rest of the year, likely with 50bps hikes in November and December," analysts at the German bank commented.

Brainard's more dovish view contrasts with Loretta Mester, who has "continued to sound hawkish". Mester has said she has seen no evidence which suggests rate hikes can be slowed.

"Overall, across the hawk-dove spectrum, there appears to be a relatively broad agreement on the terminal rate at or a bit above 4.5%. However, our latest analysis suggests that r-star may have risen since the pandemic, with macro drivers consistent with the real neutral rate in the 70-90bps range. At the very least, this analysis points to meaningful uncertainty around the Fed's long-run view of r-star," Deutsche said.

The r-star refers to what the perceived neutral interest rate is, so one that does not curb nor quicken growth. Since the Fed is currently in a tightening cycle, the federal funds rate is well above what the perceived r-star is.

Despite signs of divisions, it was all-in-all another hawkish set of minutes by the US central bank, with all eyes now on its November 2 interest rate decision.

"The Fed looks unlikely to pivot anytime soon. That brings us to today's main event, which is the US September CPI release," analysts at ING commented.

"While any sub-consensus number could see the dollar briefly dip, we doubt it would alter expectations that the Fed hikes 75bp in early November and dollar weakness should prove temporary."

Annual US inflation is expected to have slowed to 8.1% in September from 8.3% in August. August's figure had come in ahead of consensus of 8.1%, however.

By Eric Cunha; [email protected]

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