Yesterday’s Federal Open Market Committee’s (FOMC) statement was the most hawkish issued in quite some time. It presented an optimistic story of strengthening labor markets and economic growth. Yet it also included the surprising comment that “the case for an increase in the federal funds rate has strengthened but [the Committee wishes], for the time being, to wait for further evidence of continued progress towards its objectives”.
To us, this statement reads as: “This time we really mean it, a rate hike is coming! But not quite yet.” Many Federal Reserve Governors, appointed in Washington as members of the Federal Reserve Board, appear to be of the opinion that there is no need to raise rates if inflation is not threatening the long range target of 2%. They all voted for no change. Indeed, the governors do not typically vote against the Federal Reserve Chair.
In contrast, many of the regional Federal Reserve Presidents had a different view. While the New York Fed President has a permanent seat on the FOMC, the other 11 regional Fed Presidents rotate across four voting seats. Three of those four voted to increase rates. But, in addition, eight of the 12 districts requested an increase in the discount rate (the rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve Bank’s discount window) ahead of the meeting. Overall, we believe there is more support for an increase than the vote indicated.
Accordingly, the contortions of the hawkish FOMC statement attempted to placate both sides. Nevertheless, a real divide exists between the regions and the central body. Three dissents are noteworthy, even with language drafted to soothe the disagreements.
At the same time, it now appears to be a foregone conclusion that a rate hike will happen before year-end. We anticipate that only strong contrary data would change that course of action at this point. With the next meeting on November 2, six days before an election, the December meeting looks to be a better opportunity for the Fed to finally take further action.
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