September Hike Odds Plunge as Fed Minutes Reveal Hawkish Bias

The Federal Reserve's minutes from their July meeting revealed that officials were closer to raising interest rates than initially thought. The committee voted 9-3 to maintain the federal funds rate at 3.50%-3.75%, with Dallas Fed President Lorie Logan, Cleveland Fed President Beth Hammack, and Minneapolis Fed President Neel Kashkari voting for a 25-basis-point increase.

However, the minutes also showed that several officials favored higher rates immediately, while many indicated that further tightening would be necessary if inflation failed to decline. The economic data has moved since the meeting, with retail sales posting their largest decline in over a year and weaker spending at online retailers and auto dealers.

The labor market delivered the more important surprise, with employers unexpectedly cutting jobs in July, while employment gains for the previous two months were revised lower. Recent producer-price data reinforced the softer inflation picture, with July producer prices unchanged after declining 0.1% in June.

As a result, the hurdle for a hike has risen substantially, and the Fed would probably need to see renewed inflation pressure or stronger employment data before the hawkish bloc could build a convincing majority. The September meeting is still live, but the odds of a rate increase have fallen sharply, from over 70% at the end of July to around 32%.