FOMC: A hike in December remains highly likely - Fidelity

Anna Stupnytska, Global Economist at Fidelity International, suggests that a hike in December remains highly likely following the latest FOMC meeting.

Key Quotes

“The Fed decided to keep rates unchanged at today’s meeting, in line with broad expectations. While the Fed communication in the run-up to the meeting pointed to some division amongst the FOMC members as to the timing of the next rate move, somewhat softer data over the past few weeks solidified expectations for ‘no action’ in September.

 “Among recent data disappointments, the drop in manufacturing and non-manufacturing ISM surveys in August is perhaps the most concerning, pointing to a potential slowdown in US growth momentum in the coming months. Moreover, a number of consumption-related data points, including retail sales, have also been weak as of late, posing questions on the ability of consumers to continue driving growth going forward. In addition to somewhat weaker data, the upcoming US Presidential elections must have played some role in the Fed’s decision to stay on hold for now. Given the uncertain nature of the election and the unpredictability of the market’s reaction, a decision to wait and see is wise, in my view.

“Looking ahead, barring significant deterioration in the data and/or big external shocks, I believe a hike in December remains highly likely. Three members of the FOMC dissented today which is a hawkish signal supporting this view. Financial conditions have eased over the course of the year, partly on the back of a weaker dollar and lower bond yields, and now at more accommodating levels than a year ago, lowering the bar for a December hike.

“Moreover, a decision whether to hike rates or not this year has now become a question of the Fed’s credibility. Investors have been frustrated with the Fed’s confusing communication as of late and seemingly little concern about potential financial stability implications related to keeping rates low for so long. A well telegraphed hike in December would go some way to appeasing these concerns.”