November FOMC: Fed Holds Rates, Case For Rate Hike Rises

The US Federal Reserve Bank decided to leave the short-term interest rates unchanged at 0.50% at its meeting yesterday, in a widely expected outcome. While most members agreed to leave interest rates unchanged, there were still two dissenters at the meeting; Esther George and Loretta Mester, voting for a rate hike at the November FOMC meeting. In September FOMC meeting, there were three dissenters, including Eric Rosengren who at the November meeting voted to leave rates unchanged.

After the Federal Reserve hiked interest rates by 25bps last December (2015), rates have been kept steady for 11 months this year.

Rate hike likely in December, but…

The November FOMC statement was seen to be more upbeat, noting that “Inflation has increased somewhat since earlier this year.” Fed officials remain hopeful that inflation will rise to the 2 percent target over the medium term on transitory effects from the decline in energy and import prices.

Officials said that the case for a rate hike has “continued to strengthen” but preferred to wait for the “time being” for further evidence of a strengthening economy before pushing rates hike. The next FOMC meeting is scheduled for December 13 – 14 which is also followed by the press conference from Janet Yellen.

However, some experts believe that the Fed’s language was not entirely hawkish.

Aberdeen Asset Management’s Luke Bartholomew said the FOMC statement gives the Fed enough room to skip a rate hike in December if the right conditions do not prevail.

“The labour market is doing well; inflation is creeping up, and growth is good. However, there’s the small matter of the US election to navigate in between now and the US Federal Reserve’s next meeting. That’s why the statement carries enough room for the Fed to wriggle outcome December if economic and financial conditions change.” Bartholomew said.

The CME futures, Fed funds watch tool has assigned a 71.5% probability of a 25bps rate hike for the December meeting following yesterday’s FOMC decision. The probability increased from 68.4% from the previous day.