Don’t Expect Fed to Clarify Its Plan
The Federal Reserve will almost certainly keep interest rates unchanged this week; anyone hoping for a clear signal about December’s meeting probably will be disappointed
By Steven Russolillo
The Federal Reserve will keep us in suspense.
No, not about this week’s meeting. The Fed almost certainly will sit on its hands a week before the election. But anyone hoping for a clear signal about December’s meeting probably will be disappointed. Rate setters were far more obliging just over a year ago, before the first rate increase in nearly a decade.
The clues are there, though. Improving economic conditions, including last week’s strong-than-expected reading on growth, suggest the Fed is getting closer to another rate increase. Markets are increasingly betting on a December move. In fact, the signs are stronger than a year ago.
In September 2015, the Fed surprised many by not lifting rates. In the days prior to its meeting in late October of last year, federal-funds futures showed only a 33% chance of a rate increase by that year’s end, according to CME Group. The Fed then specified in October that it might be appropriate to raise rates at its “next meeting.” Odds of a rate increase nearly doubled in the ensuing week. Sure enough, the Fed raised rates in December.
The situation is different today. Traders already are placing odds of a rate increase by the end of the year at more than 80%, based on January’s fed-funds futures contracts. The Fed statement alone probably won’t boost them further. The central bank is likely to keep its options open, particularly at a time when markets could be poised for more volatility.
Sure, the stock market has been relatively calm and trading volumes have been unusually low.
But bond yields have been creeping higher. A market-based measure of inflation expectations just hit a 15-month high. And the Chinese yuan’s steep slide to a six-year low, a move which put markets on edge a year ago, has so far been greeted with a yawn.
Investors may be unwilling to make big bets ahead of the election. Yet, in the background, they aren’t sitting still. The options market is showing insurance against market swings expiring right after the election is higher than index options that expire immediately before it.
December still looks like a good bet for a rate increase, but there is much that can happen between now and then. Just don’t expect the Fed to paint itself into a corner.