No rate hike, but…
On Wednesday, the Federal Reserve released the Minutes of the Federal Open Market Committee (FOMC) for the September 20-21 meeting. The FOMC concluded that ‘the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.’
The decision to leave rates alone was not unanimous. The vote was seven in favor of not changing the fed funds rate to three against.
Voting for leaving rates at .25%: Janet L. Yellen (Fed Chair), William C. Dudley, Lael Brainard, James Bullard, Stanley Fischer (Fed Vice Chair), Jerome H. Powell, and Daniel K. Tarullo.
Voting against: Esther L. George, Loretta J. Mester, and Eric Rosengren.
Thus, the September FOMC meeting concluded for the sixth time in 2016 without a rate hike. There are two remaining meetings in 2016 scheduled for November and December.
The majority of market participants expect a rate hike at the December meeting. The Fed has been threatening not just rate hikes for the past few year but the “nomalization” of interest rates. The Fed, however has raised interest rates just once in ten years, a quarter point rate hike from 0% in December 2015.
The Fed has strung along market participants for year by threatening rate hikes. When the Fed threatens rate hikes, market participants become convinced that a rate hike is imminent and adjust their trades accordingly. The US Dollar Index has soared over the past two year on talk of rate hikes that never materialize. When market participants begin to dismiss the possibility of a rate hike, Fed officials hit the speaking circuits talking about rate hikes.
Why Does the Fed Not Want to Raise Interest Rates?
The stated reasons from the FOMC minutes constantly refer to for not raising rates are: inflation is not hitting their 2% goal and ‘slack in the labor market. At times, the Fed will also name “global economic uncertainty” as a reason not to raise interest rates. The Fed ‘doves” would like to leave interest rates alone until the Fed’s inflation goal hits at least two percent and labor market slack is gone.
Why Does the Fed Want to Raise rates?
The Fed ‘hawks’ want to raise interest rates so that they are not ‘behind the curve’ on inflation. Most Fed members whether hawkish or dovish see the efficacy in raising interest rates so that there is room to cut them in the event of a recession.
At least on Fed member, Cleveland Fed President Loretta J. Mester, believes that the economy accelerated to over 3% GDP growth and that a rate hike is needed to prevent the economy from overheating.
Irrespective of the whether FOMC members are hawkish or dovish on raising rates, several FOMC members are concerned about the Fed’s credibility. The Fed has been promising, projecting and threatening interest rate hike and never delivering them. This all talk no action dynamic has some FOMC members worries that the Fed is losing credibility with market participants.
In the penultimate paragraph of the FOMC minutes to the September 20-21 meeting the committee noted:
‘In addition, several participants expressed concern that continuing to delay an increase in the target range implied a further divergence from policy benchmarks based on the Committee’s past behavior or risked eroding its credibility, especially given that recent economic data had largely corroborated the Committee’s economic outlook.’
Maintaining the Fed’s credibility may be the unstated reason the Fed opts to raise interest rates at their December meeting.
This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.