HSBC Sees 'Slightly Better Than 50/50' Chance Of December Rate Hike

• This week’s FOMC statement indicates that fears over international developments have subsided.
• HSBC now predicts a slightly better than 50 percent chance of a December rate hike.
• The firm believes that employment reports and inflation reports between now and the December meeting will be the determining factors.

The Federal Reserve decided at its October meeting to delay an interest rate hike and chose not to significantly alter its guidance. In a new report, HSBC analyst Kevin Logan interprets the FOMC’s decision and explains HSBC’s predictions surrounding the start of the next tightening cycle.

International worries subside
The first observation that Logan makes about the Fed’s statement is that the committee no longer made reference to international developments that could negatively impact the U.S. economy. Since the Fed’s last meeting in September, U.S. equity markets have recovered from an August sell-off triggered by fears of a market collapse and economic slowdown in China. Although concerns over the economic health of China remain, markets have stabilized and the fear level has declined.

What to watch for
The language in the FOMC statement indicates that a rate hike will happen when the committee “has seen some further progress in the labor market and is reasonably confident that inflation will move back toward its 2% objective over time.”

Logan interprets this statement to mean that a December decision will be heavily contingent on the two employment reports and the inflation reports to be released between now and the December 15-16 Fed meeting.

Better than 50/50 chance
Logan now believes that the chance of a Fed rate hike in December is “slightly better than 50/50.”

“Job gains averaging better than 150,000 a month for the next two months may be enough for Fed officials,” he adds.

In addition to employment data, stabilization of exchange rates and import prices would also strengthen the case for a December hike.