Minutes shows considerable divisions in FOMC

July was a meeting where only Kansas City Fed President Esther George voted in favor of a rate hike; however, the minutes released yesterday shows deep divisions among policymakers, which left the door open for a rate hike later this year. In recent days, several FOMC policymakers, William Dudley of New York Fed Reserve and Dennis Lockhart of Atlanta Fed have stressed that September remains quite live in terms of a rate hike. The market has warmed up to the possibility but still remain broadly skeptical. After dropping to zero after the UK referendum, rate hike probability has bounced back to 25 percent.

According to the minutes,

• Couple of policymakers called for immediate rate hike (Esther George, one of them)
• Most of the Fed Officials agreed that the strong jobs market and better than expected market reaction to the UK referendum some has urged caution citing low inflation. Though only two called for an immediate increase, some of the others said a rate hike would soon be warranted.
• Those who called for caution believe that the Fed will have ample time to react to inflation.

We expect that the true nature of the disagreements would be clear in September meeting, which is scheduled on 20-21 for the month. If Ms. George still remains the only dissenter it would be considered very dovish, even if the Fed goes for a hike in December.

The market interpreted the minutes as dovish. S&P utilities moved higher, yields dropped and the dollar weakened. The dollar is currently trading at 94.5, down -0.22 percent for the day so far.