All eyes on December FOMC Meeting

As had been widely expected, the US Federal Reserve’s Open Market Committee (“FOMC”) kept interest rates unchanged yesterday. In all fairness, it was never really on the cards as the market was only pricing in a 16% change of a rate hike as at last Monday. On the same day, the last day of October, market expectations were for a 71% rate hike in the Fed’s December rate setting meeting. Now the likelihood of a 25 basis points increase in interest rates has shot up to almost 80% at the time of writing.

The Committee noted that it remains aware that their remains short-term risks to the economic outlook, and termed this as ‘roughly balanced’ whilst reiterating the intention to keep on monitoring closely development in global capital markets but most importantly, to pricing pressures (inflationary data).

Following the string of positive data of late, there is now an even stronger case for a rate hike next month, however the FOMC stated that it had ‘decided, for the time being, to wait for some further evidence of continued progress towards its objectives. One could interpret ‘some’ as being highly indicative that a rate hike is merely round the corners as the bulk of the data points the Fed was expecting are now in-the-bag.

Touching upon the issue of inflation, the FOMC praised the tangible progress made on this front, acknowledging that inflation has crept upwards, albeit slightly, adding that it still however remains on the low side. All in all, yesterday’s statement included only slight changes to the one in the previous statement, with household spending described as ‘rising modestly’ from ‘growing strongly’.

From a market perspective, delaying any possible action to the December meeting makes sense. Given the fact that the Presidential election race is neck-to-neck and expected to go down to the wire, with the gap narrowing by the day, it was a prudent move as the market will be inevitably taking stock of the situation post-election. We remain cautious heading into next week’s Presidential election as we are aware that the election has the potential of putting the Fed’s plans off track.

It is no secret. Trump’s policies and vision are not market-friendly and any possible victory by the Trump camp can result in a sharp market correction in US equities, which could prompt the FOMC to immediately put the brakes on the interest rate hike pedal. So at these crossroads, the FOMC is in a tricky position on how to deal with the December meeting. Although looking at incoming data and ongoing global economic events is a given, the Fed will now clearly be monitoring the situation domestically and leave its decision down to the wire. Although there seems to be market consensus that a December rate hike is a given, developments over the next couple of weeks could prove otherwise.