October 27-28 ‘15 FOMC Meeting

In a Nutshell:  “In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress — both realized and expected — toward its objectives of maximum employment and 2 percent inflation.”

Rate Decision: Fed funds rate maintained at a range between 0% and 0.25%

At the September FOMC meeting, the Fed threw a monkey wrench into the rate hike gears by focusing on global and economic conditions.  By this week’s meeting, markets had largely discounted the possibility of a December increase.  That consensus should be reconsidered. 

As is usually the case, the statement released by the Fed was not vastly different from the previous one, but the changes were significant enough to raise some eyebrows and the implications were pretty clear. 

The importance of global economic and financial developments was downgraded to issues that will be monitored.  They goofed by raising the rest to the world to a central position in policymaking and that was corrected. 

The committee’s view of the labor market did not change much, despite the recognition that job gains had slowed.  The members still felt that “… labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year.”

As for when rate hikes might start, the members sent a clear warning that it could be soon when it was noted that it might be “appropriate to raise the target range at its next meeting.” 

The data will drive decisions, but by specifically saying, “next meeting,” the Committee put everyone on warning that there actually may be a bias toward moving.  If so, the data may only have to support a hike rather than having to be strong enough to force a hike.

What would drive a rate hike in December?  Well, the Committee would love to see some small movement up in inflation. 

They have accepted that “inflation is anticipated to remain near its recent low level in the near term,” but that doesn’t mean they aren’t rooting for some nice sized price hikes when we get the next couple of inflation reports.  They also need to see job gains strong enough to keep the unemployment rate falling and, hopefully, wages rising faster. 

The hurdle is not that high as most economists now believe that job gains as little as 150,000 or even less could be enough for the unemployment rate to continue declining.  There is every reason to believe that will happen in both the October and November employment reports that will be released before the December 13-14 meeting.

So, what’s the takeaway from today’s statement? 

The Fed got its communication act together and put back on the table the possibility of a rate hike in December.  The likelihood is not great but it is higher than thought going into the meeting. 

If the data give the Fed some cover, a December rate hike could occur.

(The next FOMC meeting is December 13-14, 2015.)