Fra BNP Paribas:
November’s FOMC statement suggests the Fed intends to nudge up rates soon amid roughly balanced risks, moderate economic growth and anticipated progress on inflation. We see a 75% chance of a 25bp hike at the 12-13 December meeting, up from 65% before yesterday’s statement. This will rise through time as the probability of adverse shock erodes.
A December hike is not a done deal. A key uncertainty is next week’s US Presidential election and financial markets’ reaction to the outcome. As widely expected, the FOMC kept rates unchanged at its 1-2 November meeting, but took some baby steps towards the next hike by saying that the case for higher rates “continued to strengthen.”
Now, it only needs to see “some” further evidence of continued progress toward its objectives, which we interpret to mean that we are closer to the next hike than we were in September. Barring significant shocks, we expect the Committee to raise rates by 25bp at its 12-13 December meeting, and November’s statement made us more confident in this our forecast. The statement was very much in line with our preview and gave no surprises.
The broad message of the policy statement was the Fed’s forecast remains on track. It still considers near-term risks to the economic outlook to be “roughly balanced” and continues to closely monitor inflation indicators and global and financial developments. The description of household spending was downgraded slightly to “rising moderately” from “growing strongly”, but this was no surprise. Consumption roared in Q2, and with headline inflation picking up, it should cool off a bit.
In November’s statement, the Committee had some tangible progress to report on inflation: It acknowledged that inflation has moved a little higher since earlier in the year and that marketbased measures of inflation compensation have “moved up but remain low.” There were two dissents (George and Mester) to the decision, down from three at the September meeting.
Boston Fed President Rosengren withdrew his dissent this time and voted with the consensus, as expected. Importantly, no calendar date was explicitly mentioned in the statement. The beauty of datadependent forward guidance, especially language as vague as “some further evidence of continued progress” is that it provides the Fed with an escape route if it needs one.
A key uncertainty is next week’s US presidential election, and the financial markets’ reaction to the outcome. Polls have narrowed in the last week, and the potential always exists for an 11th hour surprise (or two). Markets have been jittery of late, and it is unclear if the unease reflects pessimism about candidates’ policies or a dislike of uncertainty.
Whatever the outcome of the election, a major shock to financial markets sometime before December, were it to have material implications for growth and inflation, would obviously be something the Fed would need to take into account. It could require a reconsideration of the timing of the next rate move
