Minutes of Fed's September meeting

Minutes from the Federal Open Market Committee's (FOMC) September meeting show the balance of opinion among members coalescing on rate hikes this calendar year. As the minutes put it, "most participants continued to anticipate that, based on their assessment of current economic conditions and their outlook for economic activity, the labor market, and inflation, the conditions for policy firming had been met or would likely be met by the end of the year."

Instead of heeding the Fed's call, market expectations for rate hikes have shown increasing sensitivity to individual data reports. Following last week's disappointing payrolls report for September, futures markets pushed the timing of the first rate hike to March of next year.

The Fed's conundrum is in part due to its own communication strategy to emphasize the "data dependent" nature of policy decisions. In an effort to increase transparency, the Fed may have inadvertently trained market participants to place too high a focus on the month-to-month gyrations in economic data, rather than on the big picture - the medium-term outlook.

Pulling the lens back can help reinstate a perspective on the economy's foundation, outlook and risks. A broad sweep of the data indicates the U.S. economic foundation has become sturdy enough to support a modest rise in rates, even with a backdrop of emerging market uncertainty.

"If the Fed wants to solve the expectations conundrum it will need to be more precise on its interpretation of the economic data in the context of its outlook. If it cannot, it risks either jolting financial markets or waiting too long for fear of doing so", says TD Economics.