Wednesday 26th September 2018
The Fed today, Italy's budget tomorrow : One's a racing certainty, the other ..... well, not so much
ref :- "Fed Dots to Harden Views for December Move : Decision-Day Guide" , Bloomberg Markets
One of the talking heads on some financial media station or other this morning let us know that he "wasn't expecting any surprises from the Fed" . Is that what they call a tautology, or just a case of stating the bloomin' obvious ? It doesn't really matter .... the Fed Open Market Committee (FOMC) announce their latest decision on monetary policy later today (2.00pm NYT), and we know what the talking head means. Expectations of a 25 basis point hike in the Fed Funds rate (from the 1.75 - 2.00% band to 2.00 - 2.25%) are just about as universal as these things can be.
If a September move had ever been in doubt (and at one stage it was .... sort of), any uncertainty has been removed by the continuing stream of economic data highlighting strong growth and tight labour markets. At long last, there are also some early signs that those tight labour markets are translating into upward pressure on wages .... which of course means upward pressure on inflation.
So as far as the fundamentals go, the case for a hike is rock solid. But even if you had just been listening to Fed officials you'd have quickly come to the same conclusion. When longtime doves likes Chicago Fed President Charles Evans and particularly Fed Governor Lael Brainard start sounding more hawkish it leaves little room for any doubt, and if it's not quite the "done deal" that the September decision is, it's looking very likely that there'll be another hike in December ..... about 84% probability judging by Fed Funds futures markets. That would take us to four hikes for the calendar year, which in all truth (and not just with the benefit of hindsight) was always likely to be the case once the current administration added massive fiscal stimulus (tax cuts and government spending) to an economy already moving along strongly.
Of course close attention will be paid to the forecasts and statement accompanying the policy decision for confirmation that another hike is coming in December. But since investors are already pretty convinced about that, perhaps more important will be clues about what's going to happen in 2019 and beyond. The "Dot-Plot", the map of rate forecasts by individual members of the FOMC, is always key and we can expect some higher expectations than we saw in June. If (and it's always a big "if") things carry on the way they're going, the once questionable call for three hikes in 2019 now looks almost conservative. Even the aforementioned Lael Brainard now reckons that the short-term neutral rate of interest -- the rate which neither stimulates or restricts growth -- might have moved higher, and if she is thinking that way then it's hard to imagine that others won't too.
There has been a good deal of speculation over whether the Fed will ditch the adjective "accommodative" in describing their policy, and substitute something more neutral. Interestingly, some would view that as mildly doveish ..... suggesting that the Fed is hinting that the job is part complete, rather than signalling a move to a more hawkish position. We can't say that we buy into that theory necessarily, particularly in light of the economic data. If that is all pointing one way at the moment, investors will want to see how much emphasis the Fed puts on the dangers to the continuing strong growth / falling unemployment / rising inflationary pressure scenario. There are plenty of those ..... the Trade War for a start. Or a strong dollar ..... and if the dollar is strong on the back of rising rates in the US, what does that double-whammy mean for emerging markets ? And what would a crisis in emerging markets mean for the US economy and Fed policy ?
We doubt that that either the statement or Chairman Jay Powell would ever bring up the question of political interference in Fed policy voluntarily, but he may well get asked about it in the Q & A session. It doesn't take a genius to guess what Mr Powell thinks about that, but if he's got any sense -- and of course all the evidence is that he's got plenty -- he'll dead-bat any questions on the topic. It'll be up to the rest of us to wonder at the irony of the President complaining about higher rates when some would say that it was his addition of massive stimulus that made them inevitable.