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Fed Sets Course Toward a December Rate Hike

Karl Schamotta November 8, 2018

The Federal Open Market Committee unanimously voted to keep benchmark interest rates in a range between 2 and 2.25 percent in a widely-expected decision released less than half an hour ago. In the last statement to be delivered without a press conference, policymakers highlighted robust growth, saying “Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined”.

Near-simultaneous growth in employment levels, the overall labour force, and hourly earnings are acting to support the case for additional monetary tightening. This morning’s weekly claims data suggested that the number of Americans receiving employment benefits remained at a 45-year low last week, and last week’s non-farm payroll report showed that ongoing job creation has pushed the unemployment rate to 3.7 percent – the lowest since the sixties, and well below Federal Reserve policymakers’ current median estimate of “full employment”. Average hourly earnings are up 3.1 percent over the past year, and gains have accelerated to a 3.4-percent annualized pace over the past three months – suggesting that inflationary pressures could soon intensify.

The Fed’s statement repeated a belief that “gradual increases” in the target range for rates should be expected, with both headline and core inflation measures tracking close to the central bank’s 2-percent target. “Risks to the economic outlook appear roughly balanced,” it said.

There was no mention of the volatility that has pummeled financial markets since mid-October, but policymakers did note that the “growth of business fixed investment has moderated from its rapid pace earlier in the year”. Further detail on this was absent, but inclusion of this sentence suggests that officials are carefully monitoring the impact of President Trump’s trade wars on corporate investment plans.

The Fed has boosted rates eight times in the current cycle, with a further one predicted to come at the December 18-19 meeting. Money markets have discounted at least two more hikes over the next year (with odds on a fourth fluctuating around the 1-in-3 mark).

The dollar is responding positively, rising marginally on a trade-weighted basis over the last few minutes – but the currency continues to face headwinds in the aftermath of Tuesday’s mid-term elections. A congressional stalemate is expected to weaken stimulus-fuelled momentum in the American economy, reducing pressure on the Federal Reserve and limiting upward pressure on Treasury yields – potentially restraining the greenback in the months to come.

Bottom Line: In its latest decision, the Federal Reserve stayed on-message, and on-course toward a December rate hike – keeping markets and the economy on a stable footing. A tree fell in a forest, and everyone was around to hear it – but it didn’t make a sound. Currency markets remain largely unmoved.

Karl Schamotta
Chief Market Strategist

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