The Federal Reserve looks poised to forgo a chance to prove its favourite points.
Officials have three mantras: Every meeting is “live” for an interest-rate move, policy is data dependent and decisions aren’t politically motivated. They could match words with deeds by raising rates next week, but they probably won’t.
A rate hike at the Federal Open Market Committee’s November 1-2 meeting would show they mean what they say. Economic data have been strong since it met last month. The decision comes just days before the US presidential election. And there’s no press conference with Chair Janet Yellen – briefings investors have interpreted as prerequisites for a move so she can explain why.
Still, economists and investors don’t think an increase is that imminent. Inflation is below the Fed’s 2% goal, reducing the urgency to tighten. What’s more, the committee has a meeting in mid-December, so officials could wait to see how markets react to a White House win by either Republican Donald Trump or Democrat Hillary Clinton and still be able to deliver a rate rise in 2016.
“They’d love to prove that they can go in a non-press conference month, to prove that every meeting is live, and to prove that they’re apolitical, but the issue is the election,” said Gennadiy Goldberg, an interest-rate strategist at TD Securities in New York. “It’s hard to communicate that even though they’re apolitical, they’re not blind to political risks.”
Officials expect to raise their benchmark rate by a quarter percentage point before the end of the year from a current target range of 0.25% to 0.5%, according to quarterly projections released in September.
Philadelphia Fed President Patrick Harker, in a rare admission that politics could weigh on the central bank’s policy deliberations, signalled that November may be a less-than-ideal an ideal candidate for a rate increase because of the November 8 ballot.
“What I’m worried about is, depending on the outcome of the election and what happens after that, if there are policies that would have distortive effects that we would have to respond to,” he told reporters after a speech in Philadelphia on October 13.
In that case, “it may be prudent – and I emphasise ‘may’ be prudent – to wait until we resolve some of that uncertainty,” he said.
Still, the FOMC probably won’t mention political risk in its post-meeting statement next week. Doing so would be akin to painting “a bigger target on its back,” Goldberg said.
If the central bank says it’s holding rates steady because the election could raise stability risks, politicians could easily twist the statement to argue that it has a political agenda. Trump has repeatedly said that Yellen is keeping rates low so President Barack Obama, a Democrat, can leave office on a high note.
Because it can’t admit to including the election in its calculations, the Fed could face a communication challenge in explaining a hold next week. The FOMC’s September statement and minutes of the meeting painted a sunny picture of the economy and data since then has done little to change that view. Payroll gains in September were well above the level most economist see as necessary to keep unemployment steady or falling, and inflation has shown signs of firming.
Reinforcing expectations for a December hike was a Commerce Department report on Friday showing gross domestic product expanded 2.9% in the third quarter, the fastest growth in two years. Even so, personal consumption and corporate investment in equipment were weak, the report showed.
That said, Yellen made it clear at her September press conference that the committee is willing to leave rates low for longer to give the economy “room to run.” As a result, officials could defend another policy delay by arguing they’re waiting for more information.
The Fed would also risk spurring market turmoil if it lifted rates during a non-press-conference meeting without clearly signalling in advance that it intends to do so.
“They don’t want to move when the markets aren’t expecting it,” said Scott Brown, chief economist at Raymond James Financial Inc in St Petersburg, Florida.
Investors see about a 17% chance that the Fed will raise rates at the November meeting, and they see a 74% probability that the central bank will move by the end of the year, based on pricing in federal funds futures contracts late Thursday.
Of course, that recalls another Fed catchphrase: markets don’t dictate its policy.