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The Practical Case For Why The Fed Won't Raise Rates In November

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The Practical Case For Why The Fed Won't Raise Rates In November

The Fed's monetary policy setting arm, namely the Federal Open Market Committee, or FOMC, is deep into deliberations in a two-day meeting that began Tuesday. With the verdict due shortly, most see no surprise elements in it.

Hold Mode Close To A Year

The central bank has been holding the Fed funds rate at extremely accommodative levels of 0.25–0.50 percent for some time now, although there has been growing dissent among the committee members concerning a no change stance. Rates have been unchanged since December 2015, when the central bank began its monetary policy normalization in the current rate tightening cycle with a quarter-point move.

Abounding global geopolitical risks and lukewarm and uneven domestic economic recovery are warding off a rate move.

September Decision

Following its September 20–21 meeting, the central bank left rates unchanged, belying expectations from some quarters for a small hike. The decision was not unanimous, with three Fed officials calling for a hike. The central bank did say the case for tightening has strengthened, but it would wait for further evidence of continued progress towards its objectives. This does not preclude a December hike.

However, the dot plot forecast of the Fed released in September revealed that, unlike in June, no Fed official expected an unchanged stance through the year. Three currently expect a status quo stance in 2016. The dot plot also supports the case for gradual tightening, with 10 expecting rates between 0.5–0.75 percent, while in June only six expected a similar rate.

The Fed's Twin Obsessions

Inflation and labor market conditions are the twin obsessions of the Fed, as it seeks to achieve its dual objective of maximizing employment and fostering a stable pricing environment. The labor market is up and running, with the economy adding jobs at a brisk pace in recent years.

The latest non-payrolls survey for September showed that the economy added 156,000 jobs in September and the jobless rate held steady at 5 percent, close to a multi-year low. Although September saw a pickup in headline consumer price inflation, the core reading at 0.1 percent is benign. The annual rate of the core PCEI, the Fed's favored inflation gauge, remained unchanged at 1.7 percent in September, according to a Commerce Department report released this week.

Factors That Could Keep Fed Waiting In The Wings

  • November being a month when there is no accompanying Fed Chair's press briefing makes it less likely the Fed will act. Usually, the briefing of the Chair is seen as platform to explain away the logic of the Fed decision.
  • The November 8 U.S. presidential election is likely to deter the Fed from moving. The central bank would likely want the change of guard to be complete before making a move, as monetary policies are set with the intermediate term in mind. It is guessed even a December move may not materialize given the timing the new presidency could take to settle in.
  • The global economy is still in flux, giving the Fed less confidence to wreck a lukewarm domestic recovery.

That said, the Fed could still spring in a surprise, although it looks like a near impossibility. Wait and watch the verdict by tracking Benzinga's Fed decision coverage.

In pre-market trading, the SPDR S&P 500 ETF Trust (NYSE: SPY) was down 0.23 percent at $210.53.

 

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