The Federal Open Market Committee (FOMC), the policymaking arm of the Federal Reserve, elected not to raise the federal funds target rate at its meeting on Wednesday as the presidential election looms next week.
The Fed has indicated that it may be ready to raise the target rate in its next meeting, on December 13 and 14, which would be exactly one year from its historic rate hike in December 2015. The Committee noted that since it last met in September, “the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year” and that “the Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further.”
Lindsey M. Piegza, Chief Economist with Stifel Fixed Income, said that though the Fed has not explicitly communicated that a rate hike would occur in December, the Fed has positively assessed the economy and stated that the case for a rate hike continues to strengthen.
“Is such an optimistic assessment warranted by the Fed?” Piegza said. “With the economy growing less than 2 percent, consumers under pressure amid declining income growth, business investment negative for nearly two years, and inflation sluggishly low, many—ourselves included—would argue ‘no.’ But like most things in life, it’s all relative. And for the Fed, the apparent ‘improvement’ from extreme weakness earlier in the year is good enough to suggest a continued progression of growth going forward, despite lingering trends pointing in the opposite direction.”
Robert Denk, AVP for Forecasting and Analysis with the National Association of Home Builders, stated that the language in the FOMC’s November statement on Wednesday was nearly the same as it was from the September meeting, with the notable addition of one statement.
“The most important language that was repeated verbatim was ‘The Committee judges that the case for an increase in the federal funds rate has continued to strengthen, but decided, for the time being, to wait for some further evidence of continued progress toward its objectives,’ and within that language,‘ for the time being,” Denk said. “This sentence was new to the statement in September and a clear signal that the committee is inclined to take the next step, under the right conditions. With the consensus inching toward that position, and despite protestations of being of being 100 percent apolitical, the upcoming elections made a November hike highly unlikely. Coupled with the emphasis on clear communication, the December meeting, with its scheduled press conference is a better choice. So in this case, ‘for the time being’ may be roughly translated to ‘six more weeks.’”
Last December, the Fed raised the federal funds target rate 25 basis points from their near zero level where they had been for the previous nine years. Since then, mortgage rates have plummeted and remained near historic lows for much of the year.
“As expected, the Fed put off a rate hike until next month,” said Curt Long, Chief Economist with the National Association of Federal Credit Unions. “Given the growing amount of uncertainty over the election, it makes sense for the Fed to take a wait-and-see approach. Nevertheless, positive job data and strengthening inflation mean that a rate hike is more likely than not in December.”