November FOMC Preview

Notes From The September Meeting

The Fed kept rates unchanged at their September meeting though the meeting took a decidedly Hawkish turn with 3 members voting in favour of a hike. The decision to keep rates on hold was deemed a “close call” for many members lending the meeting a further Hawkish bias.

The statement cited that the case for an increase in the Fed funds rate has strengthened and that the outlook on risk assessment was upgraded to “roughly balanced”, paving the way for a December hike. Nonetheless, the overall tightening path is more gradual. The latest Fed “dot plot” projection suggests policy makers expect only one rate hike by the end of the year and the pace of hikes in subsequent years was further scaled back. USD weakened against all G10FX over the Fed’s inaction on policy and perhaps even signalled increased doubts over future commitments to normalise policy as Fed officials scaled back on rate hike expectations for 2017.

Data & Developments

  • ISM manufacturing and non-manufacturing both strong in September
  • NFPs missed  in September
  • Unemployment rate ticked up
  • September CPI missed
  • 3Q GDP beat expectations

Aside from a positive 3Q GD print and better ISM data, US data has generally been quite flat since the September FOMC with labour market conditions worsening and CPI undershooting expectations. Indeed, looking more closely at the GDP data, it seems that consumer spending is still at a subdued level with Personal Consumption slowing to 2.1% YoY.

Fed Speak

Of the raft of Fed commentary we have had since September, the prevailing sentiment seems to be in favour of a hike this year with the December meeting drawing most support.

Fed’s Williams commented over the month that he still expects the Fed to raise rates at least once this year but tipped his support for December saying that “I think there are some advantages, in my own mind, around a press conference” referring to Fed Chair Yellen being better able to explain the reasons for a hike during a conference.

Fed’s Dudley also gave support for a hike this year noting that “If the economy stays on its current trajectory I think … we’ll see an interest rate hike later this year”.

Expectations For This Meeting

Voting developments at the last FOMC meeting, and subsequent comments by Fed embers, show that there is a growing consensus for action in the Fed. Last time around the board noted that they opted to remain on hold in favour of seeing “evidence of further progress towards their goals”. It is unlikely that data since the last meeting has done enough to prompt a rate hike at this meeting.

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The proximity of the meeting to the US elections due to be held next week also encourages the idea that the Fed will remain on hold. The results of this election have the potential to be particularly market moving and important to the economic outlook.  Indeed, risk off price action over the last few days in response to a resurgence in support for Trump is a clear indication of the uncertainty with which investors regard a Trump presidency. As such, the Fed is likely to want to wait for these results to be digested before deciding to move on rates again.Indeed, CME group implied probability for the event gives a less than 10% chance of the Fed moving on rates.

Investors Looking For Timing Signal

The key takeaway from this meeting will be whether the Fed give a clear signal for a December hike such as they did in October last year when they noted that a rate hike might be appropriate “ at the next meeting”. However, given that rate hike expectations are much higher at this point than they were a year ago, there is less pressure on the Fed to guide markets in this manner. The voting will also be closely watched this time around with any upward shift in Hawkish votes likely to provoke further USD upside.

With no press conference following the meeting, the Fed is limited in the extent of its communication and so not expecting much in the way of new information here. Statement is likely to reflect that the Fed is moving closer towards a rate hike and upside risks are any clear timing signal and any increase in Hawkish voting.