Fed expected to hold on rates, could give strong signal for December

Federal Reserve Board Chair Janet Yellen in Capitol Hill, Washington February 11, 2016. REUTERS/Carlos Barria

As markets geared up for the Federal Reserve’s (Fed) monetary policy decision to be released at 2:00PM ET (18:00GMT) on Wednesday, bets were that the U.S. central bank would leave interest rates unchanged, but some experts felt it could give a strong signal for a rate hike in December.

U.S. elections expected to stay Fed’s hand

Analysts widely dismiss the possibility of a move on Wednesday due to the proximity of the U.S. presidential elections and markets only price in a 6.2% chance, according to Investing.com’s Fed Rate Monitor Tool.

“It’s widely understood that it would be politically treacherous for the Fed to hike just before a very heated election,” JP Morgan said in a note to clients.

Barclays noted that the meeting was likely to “uneventful”.

“In our view, the meeting is too close to the November 8 U.S. election for the (Fed) to take any significant action,” these analysts said.

“They’d love to prove that they can go in a non-press conference month, to prove that every meeting is live, and to prove that they’re apolitical, but the issue is the election,” strategists at TD Securities said.

“It’s hard to communicate that even though they’re apolitical, they’re not blind to political risks,” they added.

3 Fed members already support hike, history dismisses political obstacle

Still, the ability of the U.S. election to stop the Fed from a hike is not a sure thing.

Three of the 10 voting members on the Federal Open Market Committee (FOMC) that decides on interest rates already dissented in the September decision to keep rates steady at 0.25%-0.50%.

Kansas City Fed president Esther George, Boston Fed chief Eric Rosengren and the head of the Cleveland Fed Loretta Mester all voted to hike by 25 basis points.

Though the majority of analysts believe that the upcoming election will stay the Fed’s hand, some experts have pointed out that there is little evidence to support the claim that the monetary authority’s decision making process has been dominated by the political calendar.

Wells Fargo Funds Management chief portfolio strategist Brian Jacobsen found that nearly a third of all rate hikes have happened in election years and pointed to 1988 when the Fed raised rates just a week before the event.

“Most of the evidence suggests that every time the Fed has hiked, and even when it has eased, since 1978, it has been in response to the economic environment and not in response to the election calendar,” Jacobsen explained to AFP.

“At the next meeting”?

Nevertheless, consensus currently expects the first policy tightening to take place at the following December 13-14 meeting which will also be accompanied by updated economic projections and followed by a press conference with Fed chair Janet Yellen.

Fed fund futures also put the odds for a move at that meeting at 73.3%.

For those analysts convinced that the U.S. central bank will decide to hold on Wednesday, they are watching the statement for language changes that could send a strong signal for an end-of-the-year move.

Several experts have commented on the October 2015 statement that led up to the Fed’s first hike in a decade in December of that year.

“In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation,” the October 2015 statement said.

Before that release, Fed futures had only placed the possibility of a December hike at 33%, but the odds nearly doubled in the week following the “at the next meeting” statement.

“To keep markets on notice for a possible rate hike in December, we expect the statement to indicate that the committee is considering action ‘at its next meeting’,” Goldman Sachs said in a note.

However, Goldman did admit that it would be “a close call”.

To the contrary, economists from Nomura considered the probability of such a move to be “unlikely”.

“Given that markets are already pricing in a rate increase for December, we think that the Committee will forgo sending an explicit signal, because the FOMC may not want to set a precedent of constantly telling market participants that it’s likely to raise rates before it does so,” they explained.

 

Source: Investing.com

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