Fra BNP Paribas
We expect the FOMC to leave rates unchanged in November and to make only a few tweaks to the statement. Those small refinements should indicate an edging closer to a hike. In terms of growth and employment, consumption looks a bit softer recently than its September characterisation, but there is no need to change the outlook.
The key issues are whether the Fed acknowledges that inflation is now moving up, and if it will describes a further movement towards achieving balanced risks: We expect both to occur. In September, the FOMC judged that the risks to the US economy were “roughly balanced”, which meant the committee was very close to a hike – the committee typically has moved rates up when risks are judged to be balanced, as in December 2015.
The closeness of the vote was demonstrated by three hawkish dissents and some other participants saying they favoured a move. There does, however, seem to be a clearer mood amongst regional presidents than the DC-based governors (including the Chair) that a rate hike is due. Meanwhile, NY Fed President Dudley has said he expects a rate hike this year and the doves’ dove, Charles Evans from Chicago, has said he would be “fine” with a rate hike this year.
The base case we have for the Fed is that a December rate hike is coming, unless there is a shock to the markets or the economy before then. We judge the current likelihood of a December hike to be 65%, but this will rise as time passes and as the window narrows for some unforeseen development that could stymie the Fed. The Chair said an important contributory factor to the September decision to hold rates was the increase in the participation rate this year, which indicated more slack than previously appreciated; we expect to see a thorough discussion of this in the minutes, but we do not believe it will appear in the statement. Another concern may have been to avoid any disruption to markets that could have influenced voting in the US presidential election on 8 November.
If so, it would be very difficult for the Fed to hike in November on account of the proximity to the election. Moreover, monetary policy these days is more about what the central bank says it will do in the future than what it actually does today; there is no press conference in November, and we view it as highly improbable that a rate hike will be delivered. That leaves the focus on what the Fed will say. The first paragraph is a description of recent economic developments.
The September version painted the summary over recent months, and we see no reason for this one to differ, and expect it to portray the same broad sweep of the data, missing out the minor ebbs and flows. The characterisation of the labour market should be little changed, though the assessment of consumption growth might be edged down to ‘fairly strong, on average’, from “growing strongly”.
