Fed find new reasons to delay lift-off
Discussion of dollar strength featured heavily in the minutes from the 16-17 September FOMC meeting and threw yet another variable into the already-swirling debate on Fed policy decisions. The sharp rise in the number of references – double the number from recent meetings – shows the Fed see 12-year highs in the USD index as a risk to their inflation forecasts. Clearly markets already knew the outcome of the meeting but had attributed the delays to China uncertainty and a softening in the global outlook; the statement’s emphasis on dollar strength now makes a clouded picture look like the beginnings of a storm. The Fed’s argument against hiking interest rates has had too many faces and the directional shifts in Fed rhetoric leave markets calling for much-needed clarity. In truth, needing to appease markets is what has broken the Fed’s communication; on balance the committee does not instinctively support a rate hike but the obligation to quality and quantify this view to the market has proved problematic. Clarity and perhaps credibility will both be recovered with the announcement of a rate hike – in our view sooner that markets predict.