The US Federal Reserve looks set to lift interest rates at its December meeting after leaving them unchanged this morning.
In fact, if it had not have been for next week’s US elections, the central bank probably would have lifted rates at the meeting which finished early Thursday morning, Sydney time.
The Fed’s main rate-setting committee said the economy continues to grow and job gains remained solid.
They also were more optimistic that US inflation was moving closer toward the central bank’s 2% target (it is running at 1.7% annual at the moment).
“The committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives,” the Fed said in a statement following the two-day policy meeting.
The use of the word “some” in that statement took the eye and had US economists babbling on about what “further evidence” might be needed to make a rate rise happen.
The October Jobs report on Friday night, our time, is the most obvious place. A solid report would see the Fed lift rates.
And following that, a win by Hillary Clinton next Tuesday would clinch it but a win by Donald Trump would see the Fed looking to stay its hand until markets had settled down, which could take a month or more.
After the Fed decision, US stocks extended earlier losses and 10-year Treasury yields fell as they worried about the chances of Donald Trump becoming President next week.
The Fed’s increasing confidence about rising inflation was reflected in its view that “inflation has increased somewhat since earlier this year” and the removal of its previous reference to inflation remaining low in the near term.
Kansas City Fed President Esther George and Cleveland Fed President Loretta Mester dissented in Wednesday’s decision in favor of an immediate hike. They were among three policymakers who dissented at the last meeting in September.
In September, Fed Chair Janet Yellen said that a move before year’s end was likely as long as US employment and inflation continued to strengthen. Third quarter growth hit an annual rate of 2.9%, according to the usually conservative first estimate of GDP.
Since then, job gains have continued at a solid rate and inflation has ticked higher, putting both close to the Fed’s long-run targets. A strong jobs report for October Friday night, our time, will clinch the chances of a rate rise next month, a year after the Fed lifted rates for the first time in 8 years.
