Global Daily – Fed leaves open possibility of December hike

by: Maritza Cabezas

Global-Daily-Insight-29-October.pdf (57 KB)
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  • Fed leaves door open for December rate hike…
  • …which will likely depend on US data, financial conditions and EM risks
  • Our base case remains for a 2016 rate hike, but chances of an earlier move have increased

 

Less concerned about global developments…

The FOMC statement showed that policymakers will continue to monitor the economy and developments abroad. They, however, appear to be less concerned about global developments. Indeed, the phrase which was used to explain why the FOMC refrained from hiking in September was dropped. This phrase pointed to uncertainty surrounding global economic and financial market developments and the potential implications for economic activity and inflation. This suggests that the stabilisation in sentiment towards China and emerging markets more generally may have reassured FOMC members.

…leaves door open for December rate hike

The FOMC statement explicitly made reference to the December meeting as a decision moment. It asserted that in determining whether it will be appropriate to raise the target rate ‘at its next meeting’, whereas previously the statement referred to in determining “how long to maintain this target range”, more generally. The FOMC will assess progress – both realized and expected – towards its maximum employment goal and 2% inflation. This suggests that it leaves the door open for a December rate hike. 

FOMC statement more hawkish than expected

The above two elements imply that the FOMC statement was more hawkish than expected. Financial markets priced in a higher probability of a December hike, taking the implied odds close to 50-50. This was also reflected in a stronger dollar.

Our base case is 2016, but chances of an earlier move have risen

Our base scenario is that the Fed will wait until next year before raising interest rates, but the statement raises the chances of a December move. Our 2016 view is based on a number of elements. The FOMC is divided. At this meeting Lacker continued to vote against keeping rates unchanged, while recent speeches from a number of FOMC members suggested that they had doubts about the inflation outlook, arguing for a cautious approach in raising rates. The incoming data will have to be quite strong to convince those members that have taken a more neutral position up until now.

Yet there has been some softening in recent data. There will be two job reports before the December 15-16 FOMC meeting and it’s likely that both reports would have to show a significant improvement compared to the latest two labour market reports. Recently released data has been at best mixed. Consumption growth has also lost some momentum. Third quarter GDP growth to be released on Thursday will likely show some slowdown. Finally, it remains to be seen whether the pricing in of earlier Fed rate hikes negatively impacts sentiment, which could lead to a renewed tightening of financial conditions.