The unambiguous message from the September FOMC meeting was that the huge majority of Committee members were looking for at least one rate hike before the end of the year. Not only did the statement highlight that the case for a hike “has strengthened”, but three members dissented in favor of an immediate hike, and the updated “dots” showed that no less than 14 out of the 17 Committee members projected one hike or more by year-end 2016. The minutes added that the decision not to act already in September was a “close call”. So why not hike already in November? We think there are four reasons.
First, and most importantly, the more dovish FOMC members argued in September that there is still some slack in the labor market and “ thought it would be appropriate to await further evidence of continued progress toward the Committee’s statutory objectives.” Since the meeting we have received solid data, but by waiting until December, the Committee will be able to see more data, including two further employment reports.
Second, there is the presidential election in the US, which takes place less than a week after the November FOMC meeting. We now know that the UK referendum was one reason for the Fed to be more patient during the summer, and the unexpected outcome of the referendum undoubtedly vindicated this stance.
Third, while every meeting is a live meeting, the Fed has always liked to act at the “bigger meetings”, during which the economic projections were updated and Chair Yellen gave a press briefing. November is not such a meeting, but December is (admittedly, this is not a strong reason in general, but when the Committee is split, it may play a role).
Fourth, the minutes once again highlighted the importance of clearly communicating policy intentions to the public. Fed funds currently indicate a 17% probability of a rate hike in November, and a 73% probability of a hike in December. After the beginning of the blackout period, the FOMC won’t be able to impact these figures via public statements, which means that a November hike would come as a surprise to markets. A December hike, on the other hand, is now fairly well priced in, and another nod to it in the post-meeting statement, would align financial markets and the Fed.
We have taken profit on our short-term EUR/USD long and are looking to get long again, as technical situation suggests further gains. The 7-day broke above 14-day and both lines are positively aligned now. We have placed another bid at 1.1020.
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