The FOMC finally finds the nerve to take a stance and to communicate it clearly and directly: an interest rate increase will be discussed in December. The assessment of the economy remains positive, while international developments are no longer an immediate risk for the US scenario….
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The markets called on the FOMC to clear up its communication and, at least this time, they have been heard. At a meeting which was not expected to bring important developments, the statement conveyed the Fed’s voice as loud and clear, after the hesitation observed over the summer. The FOMC committed to a clear direction and lowered the bar for a reversal by the end of 2015. The vote was almost unanimous, with the usual dissent from Lacker, who voted for an immediate hike, as previously. The message is supported by three sections of the statement: the assessment of the economy remains positive, global risks are no longer considered as an autonomous threat, and liftoff at the next meeting is possible.
1) Assessment of the economy. The FOMC communicates that the course of the economy has not been altered by a few weaker than expected data, and still judges growth as “moderate”; while consumption and investments seem stronger, growing at a “solid” pace. For what concerns the labour market, although the employment trend slowed and the unemployment rate is stable, the statement stresses that “underutilisation of resources has diminished since early this year”. As regard prices, the current low levels of inflation are still being blamed on temporary factors (energy and import prices). Implication: time for liftoff may be nearer.
2) Outlook and risks. The statement plays down the role played by external factors as a potential obstacle hindering the reversal on rates. In October, the sentence “recent global economic and financial developments may restrain economic activity somewhat, and are likely to put further downward pressure on inflation in the near term” has been removed. This change signals that, according to the FOMC, the potential outbreak of a global crisis, which in September had been considered as a serious risk, seems to have been averted. The minutes will explain the reasons behind the change in the assessment of global risks, although they are likely to include the actual and/or verbal interventions of the PBoC, the ECB, and the Riksbank. The FOMC seems to believe that the likely further appreciation of the dollar resulting from a wider divergence between global monetary policies is tolerable, if the measures put in place by the other central banks stimulate domestic growth in the weaker regions. As a result, the Fed feels it may now shift focus back to the evolution of domestic factors. Together with point 1), point 2) opens up the option of a possible reversal in December.
3) Timing of liftoff. The implication of the assessment of the US economy and of the related risks is that the monetary policy scenario may contemplate a liftoff in the near future. This marks the FOMC’s third step in building a more transparent communication. The statement remarks that the well-known conditions for a rate hike (further improvement of the labour market and reasonable confidence inflation returning to 2% in the medium term) will be assessed at the “next meeting”.
In three weeks’ time, the minutes of the meeting will shed considerable light on the debate which led to the formulation of the October statement, and will also provide a measure of consensus for a possible hike in December. However, the almost unanimous vote on the text of the October statement shows at least that even the most dovish participants agree on the fact that it is appropriate to discuss a rate hike in December. This is also a message, which reveals greater cohesion within the Committee than assumed even only a few days ago. Next week, as many as 10 meeting participants are scheduled to speak, and will provide an initial measure of consensus on the essence of the message. Also, the main economic data releases for October (Employment Report, ISM indices) are due out. The stage is set for a hike inDecember.
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