Policymakers were divided on the rate hike
The FOMC (Federal Open Market Committee) released its July meeting minutes on August 17. The minutes were closely watched by investors for clues on the next interest rate hike.
Most of the policymakers felt that the Fed needed to wait for additional information on employment and inflation before raising interest rates. The minutes said that some policymakers, “preferred to defer another rate increase in the federal-funds rate until they were more confident that inflation was moving closer to 2% on a sustained basis.”
Meanwhile, some of them felt that another round of increase in the federal funds rate would be warranted on the backdrop of the improved job market.
Some Fed officials also raised concerns that lower interest rates for a prolonged period could result in misallocation of assets by investors. It might lead to a financial bubble, which is dangerous for the US economy.
So far in 2016, the Fed hasn’t raised interest rates in any of its policy meetings due to financial market turmoil and the global economic slowdown.
What’s in store for the next policy meeting?
Although the tone of the minutes sounded hawkish, it suggested the possibility of a rate hike in the September 20–21 policy meeting. The minutes mentioned that policymakers wanted to “leave their policy options open.”
Treasury yields rose after the release of the FOMC minutes. However, US stock markets were muted on August 17 after the release. Banking stocks such as Citigroup (C), Wells Fargo (WFC), and Back of America (BAC), that benefit from an interest rate hike, showed little movement.
In the next part, we’ll look at how the five-year TIPS auction fared last week.