Fed’s July Minutes Reveal FOMC Members Split Over Rate Hike Timing

The Fed minutes revealed quite a split among Federal Open Market Committee members at a July policy with much of the discussion spent trying to reconcile differences in opinion on the economic outlook and the timing of the next interest rate hike.

Several members wanted to wait until they became more convinced that inflation would rise to the Fed’s 2% objective after failing to clear this hurdle the last four years. Other members focused on the U.S. labor situation in the belief the U.S. is close to a fully recovered job market and a rate increase would soon be warranted, according to minutes of the Fed’s July 26-27 meeting released Wednesday at 1400 GMT.

Fed Concerned About Growth, Hiring and Inflation

It came as no surprise the minutes showed the FOMC discussion was focused on growth, hiring and inflation. There were also hints the central bank could take action as early as September, however, the consensus to take action that early wasn’t there, giving the Fed a reason to avoid making a commitment at this time, making a hike in December more likely.

“Members judged it appropriate to continue to leave their options open and maintain the flexibility to adjust the stance of policy based on incoming information,” the minutes said.

Fed Minutes Revealed Members Were Divided

The minutes indicated the following division at its July meeting: Those who wanted to refrain from making a rate hike at this time, those who were ready to make the move and those who say the key decision is getting closer.

Several Fed members “preferred to defer another rate increase in the federal funds rate until they were more confident that inflation was moving closer to 2 percent on a sustained basis,” the minutes said.

Others believed the U.S. was “at or close” to full employment, meaning a state where unemployment was low, fully recovered from recession and at a point where it falls much more it could cause more inflation. This group believed a rate increase “was or would soon be warranted.”

Fed Members Discussed Potential Financial Bubble

Fed officials also discussed market risk. They worried that continuing to maintain a prolonged period of very low rates could cause investors to weight certain investments to much or even overvalue certain assets, possibly leading to a destabilizing financial bubble and bust.

Fed Members Discussed Effects of Brexit

The FOMC minutes revealed the Fed’s worries over Brexit may have receded in recent weeks. Previously members had worried the markets would become more volatile and unstable after Britain’s June decision to leave the European Union.

“Participants generally agreed that the prompt recovery of financial markets following the Brexit vote and the pickup in job gains in June had alleviated two key uncertainties about the outlook,” the minutes said.

Investors Casting Doubts Over Rate Hike Timing

Earlier this week, New York Fed President William Dudley said, “I think we’re getting closer to the day where we’re going to have to snug up interest rates a little bit. And that’s good news.”

However, investors still expressed doubts about the Fed’s willingness to make a move in 2016. Federal funds futures traders place a 12% probability on a rate increase in September, 16% on a move in November and 48% on a move by December.