Federal Reserve Doesn't Raise Rates For Political Reasons--There wasn’t much of a surprise today when the Federal Reserve stated it wouldn’t be raising rate and that the case for a rate hike strengthened. This time 2 Fed officials dissented instead of the 3 which dissented in September. It’s strange how Steve Liesman reported this as a decision to avoid being political. The Fed not raising rates because it didn’t want to effect the election is literally the definition of being political. If the Fed were to be apolitical, it would do whatever it would normally do without the election existing. Not raising rates is still a decision just like raising rates is a decision.
The chances of a rate hike in December rose to 71.5% which, in my opinion, is an overstatement of what the Fed will do. I still think the Fed won’t raise rates because the economy is too weak to withstand one. If Trump wins the election and Yellen resigns, who knows what the December meeting will look like. I will go over the changes in the language in this statement.
The first change was about job gains. It went from saying “jobs gains have been solid, on average” to “job gains have been solid.” I would say this new statement is more bullish than the previous statement because “on average” acts as a modifier which restricts the positivity on jobs gains. This statement is before we get the Friday jobs report, so I find it meaningless. In the next statement the Fed can easily change it back or make it less bullish if the October report is weak. Anything that is bullish on the economy is hawkish, so this change is hawkish.
The second change is about household spending. The statement went from saying “household spending has been growing strongly” to “household spending has been rising moderately.” This is a bearish/dovish statement which is in response to the weakness in consumer spending we saw in the Q3 GDP report. The consumer sentiment data has also been weak. I would argue that even saying it is rising at all is too bullish because the trend is downward. Q4 GDP growth will likely be lower than Q3, so the expectations will be for another weak consumer spending quarter. This statement change is more dovish than the first statement is hawkish, so the net effect is dovish.
The next change is about inflation. The statement changed from saying “Inflation has continued to run below the Committee’s 2 percent longer-run objective” to now saying “Inflation has increased somewhat since earlier this year but is still below the Committee’s 2 percent longer-run objective.” This change is a recognition of the increase in inflation which had been partially driven by rising oil prices until recently. Oil prices have declined now that the OPEC deal to cut production appears less likely. If the market continues to weaken and the dollar continues to strengthen, this language will be reversed in the next meeting. This statement change is a hawkish one, making the net change for the statement so far about even.
There is another smaller change which goes from “market-based measures of inflation compensation remain low” to “inflation has moved up but remain low.” This is again hawkish for the same reasons.
The next change is about inflation again. It originally said “Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but” and was changed to eliminating that part saying “Inflation is expected to rise to 2% over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further.” This change is another hawkish change, but again it may change in the next statement. The Fed must’ve looked oil prices today and wondered if it should change the language because the price of oil fell 2.49% to $45.51. If oil prices remain low, it is dovish for rates. I would say the summation of changes so far is hawkish.
The final changes are about what the Fed will do with rates in the future. The statement went from “the case for an increase in the federal funds rate has strengthened” to “the case for an increase in the federal funds rate has continued to strengthen.” This is hawkish. My response to this change is “how much can it strengthen before it reaches the rate hike threshold?” Can the case for a rate hike continue to increase forever without any change? The Fed will lose even more credibility than it has lost in the past if it doesn’t raise rates again in December.
The last change is a continuation of the last sentence I quoted. It continues “but decided, for the time being, to wait for further evidence of continued progress towards its objectives.” This changed by adding the word “some” before “further evidence.” This statement is hawkish because some is a modifier which qualifies that there is less evidence needed for a rate hike now compared to September.
Conclusion
This statement was a hawkish one which doesn’t raise rates. December is expected to be a dovish rate hike. These summaries are oxymoronic because they contradict themselves. The reason the Fed wants to be dovish with a rate hike is because it doesn’t want to spook the market like it did last December. I think the market will come down regardless of what the Fed does because the market is expensive according to all valuation metrics. It is the most expensive ever according to some metrics I’ve mentioned in the past (such as P/S). The medium term response to economic weakness will be more dovishness so if this rate hike happens it won’t matter. However, I am predicting no rate hikes, like I stated at the beginning of this year.
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