FOMC Statement Omits Any Definitive Sign that December Rate Hike is Mostly Baked

November 2, 2016

Today’s was a meeting without a scheduled press conference, and the lack of a policy change eliminated any need for a change of plans in that regard. My preview mentioned that the statement might say something definitive about its December meeting; that didn’t happen.

In today’s statement, some tweaks were made to the opening paragraph that deals with recent U.S. economic conditions.

  • Assessment of household spending downgraded to “rising moderately” from “growing strongly.”
  • Inflation assessment upgraded to “has increased somewhat since earlier this year.”
  • Comment on market-based measures of inflation compensation changed to “have moved up but remain low” versus just “remain low.”
  • A prior prediction in paragraph 2 that “inflation is expected to remain low in the near term” has been deleted.

Unlike the statement of October 28, 2015, which talked about determining “whether it will be appropriate to raise the target range at its next meeting.” In that case one year ago, drawing attention to a particular meeting in fact foreshadowed the one and only rate hike thus far in the cycle. By not repeating that language, Fed officials left open more options than they did a year ago, and why not? Next week’s election has the potential to produce very strong immediate reactions in the real economy and financial markets. Fed officials need to know how things respond to the election before acting.

In a subtle way, however, today’s statement telegraphs that the committee was prepared to tighten now if only the election didn’t lie just ahead. One of the three dissenters from the prior meeting, Eric Rosengren, President of the New England District, switched back to siding with the majority. If from the meeting he gleaned a strong likelihood of tightening in December, assuming that the post-election period doesn’t tip into panicky volatility, there would be a good incentive to shift the vote to 7-2 from 6-3. The latter implies more dissension than a 7-2 ballot, and the last thing financial markets need in the weeks ahead is the image of a highly split FOMC amid a chaotic political divide in the nation.

For what it’s worth, financial markets hardly moved on net over the 35 minutes following released of the FOMC’s statement.

Copyright 2016, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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