FOMC Statement Revives December US Rate Hike Hopes

Fed Adds “Next Meeting” to its October FOMC statement

The Federal Reserve used the penultimate Federal Open Market Committee (FOMC) meeting to send a strong signal on the possibility of a rate hike in December. The October FOMC statement was a 93 percent match from September, but there was a lot to ponder on the 7 percent difference:

• The Fed has upgraded the rate of household and business spending from moderate to solid.

• The slowdown in the job market was acknowledged but overall the unemployment rate is steady.

• The recent global economic and financial developments line was reduced and used as a summary of the events that the Fed will be monitoring.

• The biggest change that is boosting the USD across the board is the inclusion of the line: “whether it will be appropriate to raise the target range at its next meeting”.

The market consensus was pointing towards the Fed not raising rates in 2015, but given the flak aimed at the central bank a more communicative approach was taken by American policy makers. The USD has struggled against majors as the Fed’s easing intent is not clear. Other central banks have used rhetoric to signal further monetary policy and in the case of the European Central Bank (ECB) an increase to their quantitative easing program as deflation and the Fed’s lack of commitment has forced their hand.

The Federal Reserve seems to have talked itself into a corner regarding the timing of the first rate hike. Communication is at the heart of the problem. Ever since the Taper Tantrum, which was spearheaded by Janet Yellen, the American central bank has struggled to communicate clearly its intentions to the market. There was almost no transition as the Fed abandoned forward guidance and started using data dependency as a way to set expectations.

The June and September FOMC meetings have come and gone, and with them two solid candidates for a rate hike. Global economic conditions have changed and the U.S. recovery is in question if the speed of the headwinds escalates.

Central banks after unshackling market volatility are having trouble boosting growth and have gone back to their monetary policy bags of tricks. The Federal Reserve is losing support from strong economic indicators as it approaches the end of the year. As BOE’s Carney mentioned: a rate hike is a possibility, not a certainty. Fed Chair Janet Yellen cannot directly improve the state of the U.S. economy, but she can exert her influence in improving the transparency of the central bank’s communication with the market.