Fed Remains On The Sidelines, by Time Duy: As expected, the Federal Reserve left policy unchanged this month. The statement itself was largely unchanged as well. The near term inflation outlook improved, going from this is in September:
Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further.
To this in November:
Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further.
With the year-over-year impacts of oil prices falling out of the data, headline inflation will track back upwards. Not a big surprise. With regards to the timing of the next move, the Fed went from this in September:
The Committee judges 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.
To this now:
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.
See what they did there? Conditions are moving in the right direction, but the Fed still waits for some “further” evidence. Continuation of recent trends is likely sufficient to be that “further” evidence needed to justify a rate hike in December.
What would derail a December rate hike? Greg Ip at the Wall Street Journal speculates that a Trump win in next week's election would do the trick:
…a Trump victory would probably cast enough of a pall over the outlook to give the Fed reason to delay its next rate increase into next year. Ironically, Mr. Trump may discover that he, not Mr. Obama, is the reason the Fed hasn’t tightened.
Agreed, although this doesn't seem likely at this juncture. More likely to stay the Fed's hands would be a slowdown in hiring to something closer to 100k a month. That would probably end the downward pressure on the unemployment rate and raise questions about the Fed's basic forecast that the unemployment rate will continue to decline in the absence of additional rate hikes. We get two employment reports before the December meeting; for the Fed to stay on the sidelines yet again, we probably need to see both reports come in weak. The first one – for October – comes Friday morning. ADP estimates that private payrolls will be up 147k – not surging, but still easily sufficient for the Fed to justify a rate hike. If this comes to pass, we would probably need a deluge of soft numbers to keep the Fed on hold again.
Bottom Line: Fed is looking past the election to the December meeting for its second move in this rate hike cycle. Probably need some unlikely softer numbers to hold them back again.