Is December Rate Hike On Fed's Agenda? Fed Leaves Door Open

Surprise, surprise—not really. The Federal Open Market Committee (FOMC) did exactly as the markets predicted today by standing still on interest rates, but left the door wide open for a step up next month.

That leaves the overnight rate that banks charge each other at 1% to 1.25%, which was last raised a quarter-basis point in June. That marked the second hike this year, and the Fed has said since then that another one was likely this year. There’s only one meeting left this year and it’s in December.

In its tightly worded statement today, the Fed strengthened its assessment of economic growth, noting that “economic activity has been rising at a solid rate,” despite the impact from hurricanes, replacing its “moderate” view from September. The CME’s FedWatch tool, which uses Fed Fund futures prices to gauge the probability of an upcoming rate hike, sat at a 95.2% likelihood ahead of the announcement, and moved up to 97.7% afterword.

“Hurricane-related disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term,” the statement reads. It reiterated material in the last four statements that the monetary policy remains “accommodative” to support further strengthening in the labor market and a return to 2% inflation.

What was left unchanged was that the Fed continues to believe that “economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate,” adding yet again that “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

During last month’s press conference, Yellen noted that historically a tight labor market tends to push up wage and price inflation, but also risk. She indicated that she was concerned then that the Fed needed “to be careful not to allow the economy to overheat” because it might “force us to tighten monetary policy rapidly, which could cause a recession and threaten” economic growth, she said.

The statement today also repeated that “near-term risks to the economic outlook appear roughly balanced,” adding that it will monitor inflation developments closely.

The Fed suggested that it is still flummoxed by the slow rate of economic growth that appears to be keeping inflation stubbornly below the Fed’s 2% target for some time. “Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September; however, inflation for items other than food and energy remained soft,” the statement says. “On a 12-month basis, both inflation measures have declined this year and are running below 2%. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.”

The Fed did not hold a press conference today but there is one on the agenda for next month’s two-day meeting, which is slated to begin Dec. 12. An announcement on a rate decision is expected to be made Dec. 13, according to the Fed’s schedule. Typically, the Fed has tended to shy away from raising rates when there isn’t a press conference afterward to discuss the move. That might explain, partially at least, why the probability of a hike next month is so high.

There was no indication in its statement that a change in leadership might be in the offing, which is keeping with tradition with the Fed’s preference to stay mum on such issues. It is widely expected that Yellen could be replaced when her term ends Feb. 3, according to press reports. (See below.)

Meanwhile, the Markets Were….

As what tends to typically happen ahead of a Fed decision, the markets were mostly muted. The Dow Jones Industrials ($DJI) and the S&P (SPX) were marginally higher in the hour leading up to the announcement, while the Nasdaq (COMP) was edging lower. All three stayed that way after the announcement, but remember, the Fed announcement was widely expected.

Treasury yields, which run opposite of bond prices, have been falling in recent sessions and the widely-watched 10-year note was off moderately at 2.358% ahead of the announcement. Afterward, it continued to slip slightly. (See chart.)

FIGURE 1: YIELDS FALLING. The yield on the 10-year Treasury, plotted here Wednesday on the TD Ameritrade thinkorswim® platform, has been slipping this week and did so again today ahead and after the Fed’s decision to keep interest rates steady. Data source: CME. For illustrative purposes only. Past performance does not guarantee future results.

What a Tease

President Trump gave kudos to Janet Yellen today during a Cabinet meeting in the White House, saying that he thinks “she is excellent,” ribbing reporters ahead of his announcement on who will lead the Fed before he leaves for Asia this week.

He is scheduled to make an announcement tomorrow at 3 p.m. ET. When asked if Yellen was his choice, he said, “I didn’t say that.” He added, however, “I think you will be extremely impressed by this person.”

Many Fed watchers are still betting that Fed Gov. Jerome Powell, the only Republican on the Fed board, is his choice, according to published reports.

And If It Is Powell

Fed watchers appear torn about what kind of leadership Powell might provide if he is chosen. On one hand, some analysts have said, Powell, unlike many past Fed chairs, does not have a master’s degree in economics.

On the other hand, he has a deep banking background and has been, as they say, “in the weeds,” leaving other Fed watchers to believe that he might be a welcome breadth of fresh air on a committee that has been widely seen as stodgy, according to press reports. It could be interesting to see how that all shakes out, no matter who is chosen.

How They Voted

It seems to really matter to Wall Street who voted for what at these Fed meetings. Typically, if the vote is unanimous, it’s often seen as a positive note—and this one was undisputed.

This is how the score card so far this year stands: January, May, July and September meetings were unanimous while Minneapolis Fed president Neel Kashkari was the lone dissenter when rates were raised in March and June.

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