September FOMC Minutes and CPI

The September FOMC Minutes, as expected, kept open the door for a December rate hike, but still emphasized some officials' concerns of low inflation:

1. "Members ... expected that economic conditions would evolve in a manner that would warrant gradual increases in the federal funds rate."

2.  "In their review of the recent data and the outlook for inflation, participants discussed a number of factors that could be contributing to the low readings on consumer prices this year and weighed the extent to which those factors might be transitory or could prove more persistent."

There appeared to be general agreement that a decision to hike would depend on upcoming economic data.   The problem for doing so in the next few months, however, is the likelihood that the hurricanes distorted a wide range of data -- making it difficult to draw conclusions about the underlying trends.  This possibility was acknowledged in the Minutes.  They said, "Higher prices for gasoline and some other items in the aftermath of the hurricanes would likely boost inflation temporarily...."

This coming Friday's release of the September CPI could be a case in point.   News headlines have highlighted that Houston rents jumped as people were forced out of their homes by the storms.   This should have some temporary impact on the CPI, possibly affecting owners' equivalent rent -- which in normal circumstances is viewed as an important element in underlying inflation.  In principle, the Fed should not put much weight on the report if OER and Core CPI jumps. 

But, the Minutes said that, despite the acknowledgement of a hurricane effect, "Some members emphasized that, in considering the timing of further adjustments in the federal funds rate, they would be evaluating incoming information to assess the likelihood that recent low readings on inflation were transitory and that inflation was again on a trajectory consistent with achieving the Committee’s 2 percent objective over the medium term."  This emphasis raises the question whether the hawks on the Committee will dismiss a high print for the September CPI.  Whether they do or don't could be an important market focus in subsequent Fed speeches.