Fed could surprise complacent investors
A rate hike this week is still a possibility, but it’s a long shot
Could the Federal Reserve shock markets and raise interest rates Wednesday, less than a week before a historic presidential election?
Put it this way: The odds of a Los Angeles Dodgers victory in the World Series are just slightly lower. (Hint: the Dodgers aren’t in the series). Yet at least one economist doesn’t rule out the possibility.
While fears of roiling markets and thus possibly swaying the election are playing some role, the Fed has other reasons to stand pat, including mixed economic data. Employers added a tepid 156,000 jobs in September. And although the government re- ported Friday that economic growth accelerated to a 2.9% annual pace in the third quarter, gains in consumer spending and business investment were modest.
What’s more, the Fed is seen as unlikely to bump up rates at a meeting that’s not followed by a scheduled press conference in which Chair Janet Yellen can explain the move. Goldman Sachs also notes the Fed has been loath to make a move markets aren’t expecting on fears it could spark a sell-off. Fed fund futures reckon there’s just a 9.3% chance the Fed will act this week.
More likely, Goldman says, is Fed officials will strongly signal a December hike.
Fueling some speculation that the Fed could hike at a two-day meeting that begins Tuesday was the split decision at its September gathering to leave rates unchanged. Three policymakers dissented, and 10 forecast at least one rate increase by year-end.
The Fed has kept its benchmark rate at a historically low 0.4% since lifting it in December for the first time in nine years.
“Should a rate hike lead to market volatility, there is the possibility it could have some marginal impact on the election outcome,” says Barclays economist Rob Martin.
He adds that with Americans voting just six days after the Fed meeting, there would be little time for stocks to settle. And, he says, since there’s no difference to the economy if the Fed acts in November or December, why not wait a bit? The Fed boosts rates to temper inflation, but price increases have been meager.
Fed officials likely would prefer not to swing the election either way. But practically, a market sell-off could dim perceptions of the economy and President Obama, and by extension, Democratic candidate Hillary Clinton. Also, with some businesses saying election-related uncertainty is damping their confidence and investments, economists have suggested it would be prudent for the Fed to hold off and assess the vote’s impact on markets.
Yet even doing nothing can draw fire.
In September, Republican nominee Donald Trump accused Fed Chair Janet Yellen of keeping rates low to help Obama. Yellen told reporters that “partisan politics plays no role in our decisions.”
In recent weeks, though, some Fed officials have grudgingly acknowledged the face-off is part of the picture.
“What I’m worried about is depending on the outcome of the election and what happens after that, if there are policies that would have distortive effects that we would have to respond to,” Philadelphia Fed President Patrick Harker told reporters this month, according to Bloomberg News.
Asked about the election’s impact, Boston Fed President Eric Rosengren, who wanted to lift rates last month, told The Wall
Street Journal the market’s view that December is far more likely “is a reasonable bet.”
Paul Ashworth of Capital Economics doesn’t think the Fed will pull the trigger this week but says investors are too complacent.