Is a December Rate Hike Coming After Today's Fed Minutes Release?

The U.S. Federal Reserve released minutes from its October meeting today at 2 p.m., and markets scoured the report for any clues about a December rate hike.

After today's Fed minutes, a December rate hike is clearly on the table.

While the Fed minutes showed no definitive decision has been made regarding a December rate hike, the minutes had a hawkish tone. The U.S. central bank anticipates that economic conditions "could well" warrant the first interest rate hike in nearly a decade next month at the conclusion of its Dec. 15-16 meeting.

The labor landscape remains key for a December rate hike.

december rate hikeU.S. policy members indicated today that they will be assessing a range of job market indicators over the next couple weeks. Wages, hours worked, and the labor force participation rate will all be closely watched for improvements or a slowdown. The next jobs report is out Friday, Dec. 4.

The Fed will also continue to monitor inflation pressures and expectations, as well as readings on financial and international developments.

Central bank members noted the substantial global crude oil glut will likely weigh on energy prices for some time. The challenging oil environment is expected to contribute to an increase in restructurings and bankruptcies in this sector, according to the Fed.

Inflation is anticipated to remain near its recent low level, reflecting the declines in energy and import prices. But FOMC members continue to expect inflation to rise gradually toward 2% over the medium term as the labor market improves. They'll continue monitoring inflation closely.

Markets were up before the Fed minutes release and surged higher after the central bank's statement.
The Dow, S&P 500, and Nasdaq were all up more than 1.1% immediately following the Fed minutes release.

Today's news reinforces what many investors have been saying over the past month: A December rate hike is coming...

Why a December Rate Hike Is Expected

After an unexpectedly strong October jobs report, the odds of a December rate hike rose to 70%, according to futures markets.

That figure had slipped to 64% this week after the weekend terrorist attacks in Paris caused concern over the Eurozone economy. That left some traders speculating the Fed might rethink a December hike.

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Yet ahead of the FOMC minutes release Wednesday, December rate hike odds spiked to 72% amid hawkish comments from a couple of central bank members.

At a NYC conference of bankers, traders, and regulators Wednesday morning, Cleveland Fed President Loretta Mester reiterated her stance that the U.S. economy is strong enough to absorb a modest policy tightening.

Atlanta Fed President Dennis Lockhart, sitting alongside Mester, said global financial markets have calmed down since August's tumult, which prompted the U.S. central bank to delay raising rates.

"I am now reasonably satisfied the situation has settled down... So I am comfortable with moving off zero soon, conditioned on no marked deterioration in economic conditions," Lockhart said. "I believe it will soon be appropriate to begin a new policy phase."

The comments were the latest communications from Fed officials aimed at encouraging global markets to prepare for the first U.S. rate hike since June 2006.

New York Fed President William Dudley told the conference he does not expect a major market reaction to a December rate hike because it has been so loudly telegraphed.

Additionally, the Fed maintains the pace of future rate hikes will be gradual and modest.

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