Investing.com – A divided Federal Reserve (Fed) has long been sending the signal that its next move on monetary policy would be to continue the tightening cycle that was started in December 2015 when the central bank predicted that four rate hikes would occur this year.
As time waned on with no move made, the Fed now has just three chances left in 2016 –Wednesday, November 2 and December 14- to return to the path of policy normalization and yet markets remain skeptical that the monetary authority will be able to raise rates even once this year with Wednesday’s decision almost completely dismissed by analysts and markets alike.
Amid mixed messages sent to markets by several Fed officials in the last month, history suggests that the victory would ultimately go to the dovish side of the U.S. central bank.
Fed governor Esther George is widely expected to maintain her hawkish stance after dissenting at the July meeting based on her preference to hike rates by 25 basis points (bp) to 0.50%-0.75% and speculation points to the possibility that Cleveland Fed president Loretta Mester and/or Boston Fed chief Eric Rosengren could join her.
At the beginning of September, Mester reiterated that the case for a rate increase was “pretty compelling” and stressed that “pre-emptiveness is important” in an economy at full employment with inflation moving towards target.
Rosengren, meanwhile, expressed concern that interest rates were remaining low for too long. “A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery,” he warned on September 9.
Those comments came after Fed chair Janet Yellen shifted to a slightly less dovish position in a speech delivered at the Jackson Hole Economic Symposium on August 26. “I believe the case for an increase in the federal funds rate has strengthened in recent months,” she stated in what could be considered a middle ground stance.
On the clearly dovish side, Fed governor Daniel Tarullo dismissed the idea that the U.S. was running a hot economy and said in a September 9 interview with CNBC that he wished to see more sustained inflation before considering an increase in rates.
Meanwhile, fellow Fed governor Lael Brainard argued on September 12 that the U.S. economy was not at full employment and recommended prudence in the removal of policy accommodation.
With opinions seemingly divided, Atlanta Fed president Dennis Lockhart suggested that a “serious discussion” over rate increases would be warranted at Wednesday’s meeting.
In any case, former Minneapolis Fed chief Narayana Kocherlakota suggested that the opinion of Tarullo and Brainard were what convinced him that the Fed would not make a move this early.
In an opinion piece, he indicated that the Fed could either hike by a quarter percentage point or do nothing.
”The latter appears more likely, given that two Fed governors have spoken out in favor of caution,” Kocherlakota wrote.
“The last time the Fed took an action from which two governors dissented was in 1993,” he pointed out.
With consensus widely assuming that a hike would not arrive until the end of the year, markets priced in just a 12% chance of a move this Wednesday, according to Investing.com's Fed Rate Monitor Tool.
Odds for an increase at the December meeting were 58.7%.
Stay up-to-date on market expectations for future Fed policy moves by visiting: