Trending: Fed Rates Held but December Still Looks a Go

Markets have raced higher after the Federal Reserve’s decision to leave rates on hold on Wednesday, but more out of a relief rally that it is over for another month.

The Nasdaq Composite, went one further than a rally and climbed to a new record high on Wednesday amid a broad advance by US equities. The tech-heavy index rose as much as 0.9% to 5,289.5.

As widely expected, the Fed said rates remain appropriate at a 0.25% to 0.50% range where they have been nestled since December 2015 when the first hike in a decade occurred.

Federal Reserve chief Janet Yellen said on Wednesday that the central bank is “generally pleased” with the US economy and reiterated that “gradual” rate rises would be appropriate.

However, as Lee Ferridge, head of Multi-Asset Strategy, North America, State Street Global Markets said, “The FOMC but did attempt to lay the groundwork for a move before year-end. The infamous FOMC dots indicated that the majority of Fed members still expect a hike before year-end, while Chair (Yellen stated that the conditions for a tightening in policy were close to being met. As ever, however, it will likely need a series of strong data releases between now and year-end for the Fed finally to deliver.”

So the Fed has taken note of the jolt to markets that a set of sickly non-farm payrolls data delivered in August.

The Fed went further too. Yellen stressed that even though the Fed last year only raised rates slightly from near-zero levels that have prevailed since the financial crisis, monetary policy is currently only “modestly accommodative”.

She said that is because the so-called neutral rate, a level that neither accelerates nor decelerates the economy, is currently “quite low by historical standards”. That is significant because it suggests that the Fed may not need to raise rates by as wide a margin as was expected just a year ago.

Gone are the days a year ago when the Fed was implying that up to four 25 basis point hikes may be required to check a growing economy. The Fed projected the long-term policy rate will be around 2.9%, down from 3.5% in December.

Still, the fact that a chorus of regional Federal Reserve chieftains maintained the need for a hike and revealed just how divided the Fed now is on when to hike, it all points to a possible rate hike in either November or December. Yellen is first among equals on the Board, but she cannot act against the wishes of her regional force.

The likelihood is that, with a supercharged US Presidential election campaign underway where anything can happen – and already has with former US President George Bush Senior today pledging to back Hillary Clinton rather than his own party’s candidate – the Fed is not going to be keen to be accused of interfering with the political system.

“The Fed’s decision to leave interest rates untouched isn’t too much of a surprise as the market has largely priced in a December hike. However, there is a growing clamour of discontent among some observers who feel Janet Yellen and Co. are letting the market dictate policy rather than standing by their convictions,” said Mike Read, co-founder of trading network Pelican said.

So December is the earliest that the Fed might act – if data strengthens the case from here on out. And if the presidential election outcome does not require a further delay on account of weaker markets.

Story by ProactiveInvestors