EconoFACTS

October 11, 2023 | 15:09

September FOMC Minutes Reveal a Dovish Bent

Economist

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

Scott Anderson , Ph.D.

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

The Minutes from the September 20^th FOMC Meeting showed a growing sensitivity from the Committee to the two-sided risks to their currently restrictive monetary policy stance. The tone of the Minutes suggests that the Fed now has the luxury of proceeding cautiously and patiently.

“Participants generally judged that, with the stance of monetary policy in restrictive territory, risks to achievement of the Committee’s goals had become more two sided.” On the policy outlook, “All participants agreed that the Committee was in a position to proceed carefully…” though “all participants agreed that policy should remain restrictive for some time until the Committee is confident that inflation is moving down sustainably toward its objective". This is a nod to the higher-for-longer crowd. Several participants commented that, with the policy rate likely at or near its peak, the focus of monetary policy decisions and communications should shift from how high to raise the policy rate to how long to keep it restrictive. Still, three weeks ago, at the September meeting, a majority of participants judged that one more increase in the target fed funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted. Since then, the 10-year Treasury yield has moved up by around 30 basis points, the UAW strike has gone on for nearly a month, a federal government shutdown is still possible, and a serious military conflict in Israel has erupted. “A vast majority of participants continued to judge the future path of the economy as highly uncertain.”

As expected, participants noted that economic activity had been expanding at a solid pace and had been more resilient than expected. Nevertheless, they expected real GDP growth would slow near-term. The labor market remained tight, but there were continuing signs that labor supply and demand were coming into better balance. Inflation was slowing, though further progress was needed to get inflation sustainably to 2%.

Bottom Line: The Fed Minutes were not much of a market mover today, and the tone was a bit more dovish than expected, despite the threat of one more rate hike from the Fed still on the table. Notably, the probability of another Fed rate hike at the November FOMC meeting plunged to just 9.8% in the Fed funds futures market, following the release of the Minutes, with the probability of a December hike at around 19.9%. This is in-line with our forecast for no more rate hikes from the Fed, but a higher-for-longer hold in 2024. For the most part, equites held on to modest gains, and longer-term Treasury yields were generally lower on the day, holding near pre-FOMC Minutes release levels.