Last month, when the minutes from the Federal Open Market Committee (FOMC) meeting in September were released, they revealed that the decision not to hike the policy rate was a close call.
That said, there was little expectation that the Fed would announce a hike in November. While Fed officials still occasionally remind us that every meeting is live, the committee members said nothing in their public remarks since the September meeting to suggest that a rate hike was under serious consideration this week. Indeed, the odds of a November hike as priced by the fed funds futures market were only 16%, and for at least the past 20 years, the Fed has never moved when the market has priced less than a 50% chance of a move.
So with no press conference scheduled or dot plot released, all focus was on today’s Fed statement itself: how it would characterize the recent flow of U.S. data (which has been mixed), how it would describe the committee’s assessment of the balance of risks and finally how – if at all – it would signal the likelihood that the FOMC will vote to hike at the December meeting.
Reading the FOMC signals
Since the September meeting, the U.S. macro data flow has been solid if not spectacular, and the November statement did acknowledge this by pointing out that consumption growth has moderated. The statement also makes reference to the pickup in actual inflation – core PCE inflation (Personal Consumption Expenditures is the Fed’s preferred inflation measure) is running at a 1.9% annualized pace.
As for the balance of risks, that language remained in today’s statement after making its first appearance this year in the September Fed statement. This is relevant because it would be difficult for the Fed to justify a hike if it believed that risks were tilted to the downside, or if the outlook were so uncertain it could not even characterize the risks.
Finally, the committee today did choose not to take a page from the Fed statement back in 28 October 2015, when it referred to the conditions under which “it will be appropriate to raise the target range at its next meeting.”
Does this mean the Fed is trying to signal the odds for a December hike have diminished? I don’t think so. A year ago, the Fed wanted to boost market odds of a hike when it thought those odds were too low. Going into today – with those odds at 70% – the Fed appeared to be content to make minimal changes to the statement only six days before the U.S. election.
Whereas in September 2016, three FOMC members dissented, at this month’s meeting President Eric Rosengren of the Boston Fed supported the decision not to hike, leaving Presidents Loretta Mester and Esther George as the remaining dissenters.
Bottom line: Today’s Fed statement seems aimed at making as few waves as possible. It is a placeholder until the Fed next meets on 13–14 December. A rate hike at that meeting continues to be likely, if not a done deal.
Richard Clarida is PIMCO’s global strategic advisor and a regular contributor to the PIMCO Blog