Good chance Fed will nudge rate in December
IN A NUTSHELL: >> “Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further.” RATE DECISION: >> Fed funds rate range maintained at 0.25 percent to 0.50 percent. In the shadow of the ugly political campaign and the attempted politicization of the Fed, the FOMC met and decided to do what everyone expected it to do: Nothing. To no one’s surprise, the federal funds rate was not touched.
But the real question was whether the statement released after the meeting would clearly signal that a rate hike at the December meeting was likely. It didn’t. There were only hints.
There were a few changes to the statement and while they reflected recent data, they also may contain some insights into future Fed decisions. The nondescript change was that household spending is now rising moderately rather than growing strongly. No shock there.
What may be more important were the evaluations of inflation and labor compensation. Instead of saying that “Inflation is expected to remain low in the near term”, the Committee noted that “Inflation is expected to rise to 2 percent over the medium term”.
They seem to be more confident that their inflation target will be reached in a reasonable amount of time. That point was bolstered by the comment that “Market-based measures of inflation compensation have moved up but remain low”, rather than just saying they “remain low”. Yes, that is not much of a change, but it does point to their belief that labor costs are finally rising.
Otherwise, the statement was uneventful, which means it didn’t strongly hint at anything. This is pretty much what I expected given the political chaos created by the FBI Director’s action. The Fed Chair may have figured it was better to be discreet than risk being accused of interfering in the election. One government official doing that is way more than enough.
So, what is next for the Fed and when will that happen? We have two more jobs reports, including Friday’s, before the next meeting. We get revisions to third quarter GDP, October income, spending and inflation reports and two vehicle sales numbers. And, of course, there is an election next Tuesday that may, or may not, have an impact on the markets.
In other words, the Fed is positioned to raise rates in December if it wants to, or do nothing if it wants to. Chair Yellen did not go out on a limb. Actually, I am not sure she knows where the tree is yet.
Nevertheless, I still expect the Fed to nudge up rates in December.
(The next FOMC meeting is December 13-14, 2016.)