Cautious Fed Sees Labor Market Strong Enough for December Hike
Comment of the Day

November 23 2016

Commentary by David Fuller

Cautious Fed Sees Labor Market Strong Enough for December Hike

Here is the opening of this topical article from Bloomberg:

The data-dependent Federal Reserve isn’t likely to contest the evidence: The economy looks strong enough to withstand another interest-rate increase.

It will take a couple of months for U.S. central bankers to figure out the economic policies of President-elect Donald Trump. What they know now is that stock markets are hitting record highs, market-expectations of inflation are moving up and consumer sentiment has improved since the election -- all of it signaling the time is right to raise the benchmark lending rate.

“They have talked it to death,” said Gennadiy Goldberg, interest-rate strategist at TD Securities USA LLC in New York. “December is on.”

Fed officials earlier this month saw a strengthening case to raise rates as the labor market tightened, with some saying a hike should happen in December, according to minutes of their Nov. 1-2 gathering released Wednesday in Washington. They made no direct reference to the national election a week later that would unexpectedly propel Trump to the White House.

“Some participants noted that recent committee communications were consistent with an increase in the target range for the federal funds rate in the near term or argued that to preserve credibility, such an increase should occur at the next meeting,” the record of the Federal Open Market Committee meeting showed. Many officials said a rate rise could be appropriate “relatively soon,” data permitting, it said.

‘Getting Stronger’

Fed officials will hold their final meeting of the year on Dec. 13-14. While it is still difficult to tell what policies Trump will put in place, market indicators are defaulting to a forecast of faster growth and higher inflation. That’s boosted expectations of a rate increase next month. Investors see a 100 percent probability of a move, according to pricing in federal funds futures contracts.

“The Fed meeting minutes say that the case for a rate hike keeps on getting stronger and stronger,” Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said in an e-mail. “Reading through their deliberations one cannot help but feel a rate hike in December is a done deal.”

David Fuller's view

Fed governors would have had reservations about Trump but they will feel reassured by the stock market rally following his election.  They certainly will not be postponing the December rate hike over what might happen at a later date once Trump is president. 

The Fed’s main concern right now, although it will not be enough to prevent the imminent rate increase, is the strength of the Dollar Index.

The Fed is unlikely to ask the US Treasury to intervene in the forex market at today’s levels, because that could be similar to standing in front of a freight train.  However, an intervention plan to slow the Dollar’s rise has probably been discussed, surreptitiously of course, possibly in the 110 region.      

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