USA TODAY International Edition
Is Fed’s next rates call all about politics?
Next decision is due just six days before presidential election
When the Federal Reserve meets next month, the question of “Will they or won’t they hike interest rates?” will be clouded by the fog of presidential politics.
The U. S. central bank’s Nov. 2 meeting is rife with juicy story lines, as the key question of whether they will boost borrowing costs for the first time in 2016 comes amid claims from Republican presidential nominee Donald Trump that the Janet Yellen- led Fed is playing politics with policy by keeping rates low to make President Obama look good and help rival Hillary Clinton win the election.
Trump has said he will replace Yellen if he is elected.
Yellen has defended the central bank’s independence, saying the Fed doesn’t talk about politics at its meetings nor do politics play a role in its policy decisions. Yellen also fended off criticism from a Republican lawmaker that Fed governor Lael Brainard’s $ 2,700 gift to Clinton’s campaign represented a conflict of interest.
Amid this backdrop, investors still have to handicap what the Fed will do.
Paul Hickey, co- founder at Bespoke Investment Group, recently went through a “theoretical exercise” in which he argued that a Fed rate increase at its November meeting — just six days before the Nov. 8 presidential election — would help blunt criticism that the Fed is making policy with politics in mind. A November hike, Hickey theorized, would show “independence” and “reinforce ( the Fed’s) apolitical framework.”
But poltiics and appearances aside, a November hike is unlikely. Futures markets are now pricing in just a 10% chance of a rate increase next month. Most of Wall Street bets are placed on December, when the odds of a rate hike jump to roughly 60%, ac- cording to CME Group.
Boris Rjavinski, senior fixed income strategist at Wells Fargo Securities, says it’s extremely unlikely that the Fed would push rates higher simply to demonstrate its independence, adding that the next Fed rate increase will be more about the data and nothing to do with politics.
“I don’t think they would hike purely for political reasons,” Rjavinski told USA TODAY. “To move in November they will need to see much stronger- than- expected data. ... They would also need to prepare the markets for a November hike, as the market is not prepared for one, and the Fed does not like to surprise the market with its moves.”
In an interview Friday with CNBC Boston Fed President Eric Rosengren reiterated that interest rates should rise “slowly and gradually,” adding that the Fed has tended to change policy at meetings in which Yellen holds a press conference to explain the Fed’s thinking. The next Fed meeting when Yellen faces off with reporters is December. Rosengren says he is comfortable with the market’s current 2- in- 3 odds of a hike at the Fed’s final meeting of the year on Dec. 14, warning that if the Fed waits too long to hike it “may mean a faster pace of increases down the road.”
A surprise hike in November likely won’t happen, says Bill Hornbarger, chief investment strategist at Moneta Group.
“I think, for the first move, it is better that it is well- communicated,” says Hornbarger. “Given that stock valuations aren’t cheap and markets appear complacent, I think the Fed is, and will be, sensitive to that.”