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Why the Fed might still hike rates in September: Citi

The Federal Open Market Committee's July minutes might have tweaked market-watchers' expected dates for a rate hike to later in the year – if not next – but, as the minutes are digested, some argue that they are still on track for September.

Whether and when the U.S. Federal Reserve will become the first major Western nation's central bank to raise interest rates since the credit crisis began nearly eight years ago has dominated traders' thinking in recent weeks. The minutes of its rate-setting committee, released Wednesday, caused consternation among those betting on a September raise, sending the NASDAQ, Dow, and S&P 500 lower.


The main reasons the minutes were viewed as putting off the date of a rate rise are the wish of several committee members to see more signs of pressure on inflation, and also the concerns expressed about further risks from abroad.

And this Fed meeting took place before the yuan devaluation rocked world markets in August. A line from the report stating: "several participants noted that a material slow-down in Chinese economic activity could pose risks to the U.S. economic outlook" caused particular consternation.


Janet Yellen
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Janet Yellen

Yet the minutes did not, in fact "present a new, more dovish, posture" according to analysts at Citi, as they showed that the committee is still concerned about maintaining the current ultra-low interest rates for much longer. As a result, the analysts now expects even those spooked Wednesday to come back soon to expectations of a September move.

"Most importantly, the July FOMC discussion highlighted the potential difficulties in identifying and managing the emergence of new risks resulting from prolonged low rates," they wrote in a research note Thursday.


"The increased prominence of financial stability considerations in the FOMC discussion is a very hawkish signal that markets apparently ignored with the release of the July minutes."

The concerns about events abroad have been exaggerated, they argued, pointing out that the committee "did not allow foreign developments to sway their baseline assessment about the timing or pace of rate normalization."

"September it will be—barring any bunker busters," they concluded.

- By CNBC's Catherine Boyle