Prior Week Summary
It was an active week for Fed communication with the release of the September FOMC meeting minutes, as well as a speech in which the Fed chair suggested the committee may allow the economy to “run hot.” Taken together, it appears the Fed is continuing to guide the market to expect a “live” meeting in December at the same time it is trying to reinforce the notion that the current stance of monetary policy is still very accommodative.
The minutes detailed that “Participants generally agreed that the case for increasing the target range for the federal funds rate has strengthened in recent months…and that continuing to delay an increase in the target range implied a further divergence from policy benchmarks based on the Committee’s past behavior or risked eroding its credibility.”
The minutes went on to say that “Some participants believed that it would be appropriate to raise the target range for the federal funds rate relatively soon if the labor market continued to improve and economic activity strengthened, while some others preferred to wait for more convincing evidence that inflation was moving toward the Committee’s 2 percent objective.”
Importantly, in a separate speech at the Boston Fed conference, the Fed Chair mentioned that there were benefits to allowing the economy to “run-hot” to repair the damage to growth caused by the financial crisis. The market reacted rationally to the threat of future inflation risk as Treasury rates steepened in response to the comments. Over the course of the week, the 2s/10s spread widened about 8 basis points, bringing the spread to the widest levels since June.
The Look Forward
There is a relatively active data calendar this week, with updated statistics expected on price inflation, the housing market, and manufacturing activity. In addition to the economic releases, there are a number of Fed speakers on deck, starting with Fed Vice Chair Fischer speaking in New York on Monday.