Fed holds rates steady, keeps a December hike an option
November 2, 2016
As expected, the Fed opted to leave rates unchanged in today’s policy announcement, maintaining a range of 0.25-0.50% and bypassing now the seventh consecutive meeting since liftoff last December.
Bottom Line: The Fed appears increasingly optimistic regarding the pace of expansion in the second half of the year, despite extreme weakness early on, particularly on the inflation side as market-based measures of inflation compensation have “moved up.” While a move in December was not explicitly communicated, the Fed has been talking up a near-term rate increase with gusto amid perceived “improvement” in the U.S. economy, a positive assessment reiterated in today’s statement language noting the case for a rate hike has “continued to strengthen.”
Is such an optimistic assessment warranted by the Fed? With the economy growing less than 2%, consumers under pressure amid declining income growth, business investment negative for nearly two years, and inflation sluggishly low, many – ourselves included – would argue “no.” But like most things in life, it’s all relative. And for the Fed, the apparent “improvement” from extreme weakness earlier in the year is good enough to suggest a continued progression of growth going forward, despite lingering trends pointing in the opposite direction.
At this point, however, a discussion about whether or not it is appropriate to raise rates given the still lingering fragility in the U.S. economy appears moot; the tone of the November statement suggests, barring a significant indication of pronounced economic weakness, i.e. an economic shock, or a severe market reaction following the presidential election, the Fed has positioned itself to continue with a removal of accommodation in December, reinforcing the pattern of one rate hike per year as the economy continues to “recover.”