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FOMC Says Little New, December Hike Likely

Published 11/02/2016, 02:40 PM
Updated 07/09/2023, 06:31 AM

The FOMC broke no new ground Wednesday as its statement read as expected. The Fed indicated that the case for a hike continued to strengthen. It kept the risk assessment balanced, but dropped the reference to inflation staying low over the near-term. In September there were three dissents. This time there were two (George and Mester). The US dollar seemed little affected by the news and before the U.S. close, was broadly lower on the day. Equities slumped.

The Fed's economic assessment was upbeat and was especially encouraged by the continued improvement in the labor market and consumption. However, it noted that business investment remains soft. It also recognized that inflation has increased "somewhat" since the beginning of the year yet remains below the long-run objective. It noted that market-based measures of inflation have increased, which is a modest adjustment from the September statement that said that they were still low.

The rest of the statement was little changed and the pricing of the December Fed funds futures was unchanged. For the past four weeks, the December contract closed at an implied rate of 50 bp. It is now 49.5 bp, the difference is essentially the spread between bid and offer.

We see nothing in the FOMC statement to indicate either market volatility or other risks that could give officials second thought about hiking in December. We suspect that the bar to a hike is low. No significant economic shock is all it may take. Of course, a unexpected U.S. election outcome and dramatic market response could change the dynamics.

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