98.4 percent. That are the market odds of the September Fed hike. But what will happen later? In this edition of the GNM, we dig into the recent FOMC minutes to answer this question. 

September Is Certain

At the end of August, the Fed released minutes from the recent FOMC meeting. They signal broad support for another interest-rate hike in September. The following paragraph is very telling:

Many participants suggested that if incoming data continued to support their current economic outlook, it would likely soon be appropriate to take another step in removing policy accommodation. Participants generally expected that further gradual increases in the target range for the federal funds rate would be consistent with a sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.

Indeed, the market odds of the September hike are above 98 percent. So it is almost a certain move. Given that the raise in the federal funds rate is so widely expected, it should not significantly affect the gold market. Now the question is what the Fed will do after September.

Will the Fed Pause in December?

Some analysts believe that the U.S. central bank will pause in December. They present two arguments in support of their opinion. First, the minutes show concerns about international trade disputes. The FOMC members see them as an important downside risk to the economy. Indeed, most participants:

expressed the view that an escalation in international trade disputes was a potentially consequential downside risk for real activity. Some participants suggested that, in the event of a major escalation in trade disputes, the complex nature of trade issues, including the entire range of their effects on output and inflation, presented a challenge in determining the appropriate monetary policy response.

Second, the Fed officials worry also about the flattening of the yield curve, as its inversion historically often preceded recessions: