As expected, the Federal Open Market Committee held its key interest rate between 0.25%-0.50% at its November meeting.
The more important part of the decision, however, was the statement from the Fed and whether the small changes in the press release indicate the possibility of a rate hike in December.
While reading the decision is a bit of a Rorschach test, it does appear that the Fed is making a case for a hike at its next meeting on December 14.
The most significant measure that the Fed is tracking now is inflation. Inflation has been running consistently below the Fed’s goal, and any move would have to come with a strong uptick in price growth. Based on Wednesday’s statement, it appears inflation is nearing the Fed’s goal.
“In the first paragraph, the Fed noted that inflation has ‘increased somewhat since earlier this year’ and that measures of inflation compensation ‘have moved up’,” said Neil Dutta, chief economy at Renaissance Macro in an email following the statement.
“In the second paragraph, the statement cut the following, ‘to remain low in the near-term in part because of earlier declines in energy prices.’ In short, with commodity prices stabilizing, it will not be hard to see headline inflation cross 2.5% early next year.”
This makes sense as both the consumer price index (CPI) and personal consumption expenditure (PCE) measures of inflation appear to be rising. The Fed’s preferred measure, core PCE, has ticked up from 1.38% year-over-year growth in December 2015 to 1.70% in September, the most recent reading.
Add on that the Fed itself said the case for rate hikes “continued to strengthen” since its September meeting and it appears that the FOMC is priming the markets for a move.
To be fair, the Fed did say it is waiting on “some further evidence” before raising rates and the consumer spending outlook was more measured — moving from “growing strongly” to “rising moderately.” The labour market did still seem strong to the Fed, however, and if inflation continues on its current track, those two may beat out other concerns.
The US economics team at BNP Paribas said that there is a 75% chance the Fed hikes in December. Additionally, Paul Ashworth at Capital Economics said the Fed “appears to be intent” to hike at the next meeting and Ward McCarthy at Jefferies said the statement “pointed to the likelihood” of a December hike.
And it seems that investors agree, as Bloomberg’s market-based measure of a Fed hike in December has jumped to a 78% probability.
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