The Fed decided yet again not to raise interest rates at its FOMC meeting. However, it made a change to its statement which was somewhat of a surprise. It placed focus on its December meeting regarding the decision to raise interest rates. It doesn’t mean a December rate hike is guaranteed, but at least they’ll be considering it. Below is what changed in its statement:
From the September statement:
In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation.
From today’s statement:
In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation.
There continues to be several factors that the Fed could use to justify waiting in December. Unemployment is one. In today’s statement, the Fed’s jobs overview was a bit more gloomy than it was in September. The following sentence changed from:
The labor market continued to improve, with solid job gains and declining unemployment.
The pace of job gains slowed and the unemployment rate held steady.
On the positive side, the Fed was a bit more rosy on consumer and business spending. The following sentence changed from:
Household spending and business fixed investment have been increasing moderately
Household spending and business fixed investment have been increasing at solid rates in recent months
Another positive was a slight improvement in its inflation reading. However, inflation is moving in the wrong direction to justify a rate hike. The following sentence changed from:
Market-based measures of inflation compensation moved lower
Market-based measures of inflation compensation moved slightly lower
There continues to be just one FOMC member to vote against waiting on a rate hike. Just like in September, Richmond Fed President Jeffrey Lacker wanted a rate hike. He’s the most hawkish voting member on the FOMC (see Reuters Hawk-Dove scale).
The markets are seeing a slightly better chance of a December rate hike due to today’s Fed statement. Markets are pricing in a 43% chance of a rate hike in December, based on fed fund futures contracts. This had been 35% yesterday.
Future FOMC Meetings
The next three FOMC meetings are scheduled for December 15-16, January 26-27 and March 15-16. The December and March meetings will include the summary of economic projections and a press conference by Fed Chair Yellen.