Not Much New in FOMC Minutes. Gold Gains As Dollar Firms

The hawks’ argument goes something like this: Raise rates now and slow the economy so the Fed does not have to raise rates more vigorously later and possibly cause a recession. Let’s say for a minute that rates right now are at 0.50%. So, if rates are raised, say twice in the next three FOMC meetings, the economy will be slowed by a factor of X.

Yes, going slowly will make the application of the brakes smoother but, in the long run, raising rates, (theoretically) by 0.50% once, should not have an effect that is appreciably different from raising rates twice at 0.25% each time. We think this is especially true given the FOMC’s staff assessment of the U.S. economy:

• The labor market conditions strengthened in recent months and that real gross domestic product (GDP) was increasing at a faster pace in the third quarter than in the first half of the year.
• Consumer price inflation continued to run below the Committee's longer-run objective of 2 percent, restrained in part by earlier decreases in energy prices and in prices of non-energy imports.
• Survey-based measures of longer-run inflation expectations were little changed, on balance, while market-based measures of inflation compensation remained low.
• The unemployment rate remained at 4.9 percent in recent months. (In fact, it has since risen to 5 percent.)
• Both the labor force participation rate and the employment-to-population ratio had edged up since June. The share of workers employed part time for economic reasons was little changed on balance. The rates of private-sector job openings and of hires increased over June and July, and the rate of quits was unchanged.
• Compensation per hour in the business sector rose 2 percent over the four quarters ending in the second quarter, the employment cost index for private workers increased 2-1/2 percent over the 12 months ending in June, and average hourly earnings for all employees increased 2-1/2 percent over the 12 months ending in August.
• Foreign real GDP growth slowed noticeably in the second quarter, primarily owing to contractions in Canada and Mexico; economic growth in other foreign economies fell only slightly on average.

We want to pay particular attention to the final point. Canada and Mexico are the two biggest trading partners of the United States. Therefore, they act as bellwethers for the U.S. economy. Other economies, even if they grew, the growth slowed.

The full minutes can be read HERE.

Equities held higher after the FOMC minutes were released then turned mixed to down later in the session. The dollar was up against the euro by about 0.25%. Bond yields were up though slightly flat. Gold rose, finally overcoming the strengthening dollar with strong regular trading action.

This all tells us the markets are anticipating rates to hold in November and perhaps even in December. The latter is still a question mark, but we have two more data sets on growth, employment and inflation before December 14 when the next FOMC meeting concludes.

The VIX jumped yesterday and today but has now backed off the 16 level and is headed back down. A week ago the VIX stood at roughly 13.5.

A final note: oil fell 1.00% as it was announced that OPEC, despite all its talk, saw production from the cartel rise. That output was at an eight-year high. And standing like an avenging angel, should prices go up is the U.S. higher-priced production sector.

Wishing you as always, good trading,