The Federal Reserve left monetary policy unchanged on Wednesday while again noting that the argument for a rate increase had strengthened with a solid labor market and increasing inflation.
The Fed kept the base rate in the 0.25 percent to 0.50 percent band, as expected, where it has been for eleven months following last December’s 0.25 percent hike, the first in over a decade. Before today’s FOMC meeting the probability for a hike had been rated below 20 percent by the futures market.
While the Federal Open Market Committee (FOMC) made no mention of the U.S presidential election in six days, a rate increase at this stage of the campaign, particularly as it would have been a complete surprise, was judged by almost all analysts as a near impossibility.
Historically the central bank has been very reluctant to make any policy perceived as favoring one political party or another. There was also no scheduled news conference today. The Fed has said in the past it will not make a policy change without holding a press briefing and questions.
“The committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives,” said the FOMC statement after its scheduled two-day meeting in Washington. The vote was eight to two in favor, with Esther George of the Kansas Fed and Loretta Mester of the Cleveland Fed voting for a quarter point increase.
As they have repeated in every statement for more than a year the governors said that, "Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further."
Expectations for an increase at the December 14th meeting jumped sharply to 78 percent from about 60 percent before the meeting.
Equities lost modestly, trending lower for most of the day and continuing the direction of the past week. The Dow shed 77.46 points, closing at 17,959.64. It was the fifth losing session in a row and the first close below the 17,971 support line. The Dow is 3.8 percent below its August 15th all-time high at 18,668.44.
The S&P 500 dropped 13.78 points to 2,097.94, also its fifth straight decline. It was the lowest close for the broad market since July 7th. This opens the index to technical weakness in the quickly traversed range between 2103 and 1991, the subject of a five session fall and recovery from June 24th to June 30th. The index has lost 4.4 percent since its August 15 high at 2193.81.
The dollar fell against the euro and yen but gained against the British Pound and Mexican Peso. The greenback slipped half a figure against the united currency, finishing at 1.1098, its sixth loss in the last seven sessions. Since October 25th the euro has gained 1.9 percent against the dollar.
The yen rose to 103.30 on Wednesday, up slightly less than one percent, The Japanese currency has added 1.9 percent since its recent low on October 28th at 105.29.
The pound drifted lower closing at 1.2304. Since the middle of October the sterling has moved in a narrow three figure range between 1.2090 and 1.2376 as Brexit concerns compete with the recent election induced weakness in the U.S. Dollar.
The FOMC statement said, as it did at the last meeting, that it Fed would wait for “some further evidence” of progress in the economy before raising rates. In reality the Fed is not waiting for evidence of progress so much as evidence that the economy is not deteriorating. If nothing substantial changes in the next six weeks the Fed will keep its word and close out 2016 with a 0.25 percent increase.
The first test will be this Friday's Employment Situation Report from the Labor Department. .
Non-farm payrolls have been fitfully declining for most of the year. In the final quarter of 2015 payrolls averaged 282,000, the highest in six years. Barring the one month anomaly in May 2010, that was the best three-month total in over 12 years.
The third quarter’s 192,000 NFP average is deceptive. Though it was on par with 196,000 in the first three months of the year and a strong recovery from the second quarter’s 146,000 average, it tailed off sharply in the final two months. In August and September the average dropped to 162,000. That is below the 178,000 average for 2016 and 21,000 below the average for the prior seven months.
Payrolls are at the Fed tolerance limit. The expected October NFP number of 175,000 is just enough to keep a December hike on track.
Though with so much credibility staked on December it might take a veritable collapse in job creation for the Fed to take 2016's last chance rate hike exit.
Chief Market Strategist
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