3 Takeaways from the November FOMC Statement

Hi, forex friends! The latest FOMC statement didn’t cause a lot of fireworks, but there were a few important things that you may wanna keep in mind when the December FOMC statement finally rolls around.

1. FOMC members voted to maintain policy (again)

As has been the case for the entire year so far, the Fed decided to maintain the target range for the Federal Funds Rate between 0.25% and 0.50%. That means that seven FOMC meetings have already passed us by, and we’ve only got the December meeting left before the year ends, and still no rate hike from the Fed.

The Fed did reinforce its stance in support of a rate hike, though, saying that “the case for an increase in the federal funds rate has continued to strengthen.” However, the Fed “decided, for the time being, to wait for further evidence of continued progress toward its objectives.” In short, the Fed is still in wait-and-see mode, and has been so since it hiked rates last December.

2. One dissenter backed out

Despite the Fed’s hawkish statement about the case for a rate hike continuing to strengthen, the voting records seem to show a different story. In the previous FOMC statement back in September, there were three dissenters who wanted a 25 bps rate hike then and there, namely (1) Kansas City Fed President Esther L. George, (2) Cleveland Fed President Loretta J. Mester, and (3) Boston Fed President Eric Rosengren. This time around, however, Rosengren decided to back out and rejoined the majority who wanted to keep rates steady.

3. Overall positive views on the economy

Growth

The Fed said that household spending, which is the main driver of the U.S. economy, “has been rising moderately.” This is somewhat less hawkish compared to its previous statement where it said that household spending “has been growing strongly.” The Fed also repeated its lament that “business fixed investment has remained soft.” Still, the Fed remains optimistic that “economic activity will expand at a moderate pace.”

Labor Market

Despite the disappointing readings for the August and September NFP reports, the Fed still concluded that “job gains have been solid,” likely because the readings for both NFP reports didn’t go below the 100K floor, which is the number of new jobs per month that’s needed to keep up with the working-age population growth. The Fed did note that “the unemployment rate is little changed in recent months” despite the “solid” increase in jobs. However, the Fed is still optimistic that “labor market conditions will strengthen somewhat further.”

Inflation

The Fed’s statements on inflation is noteworthy, particularly the addition of the phrase that inflation “has increased somewhat since earlier this year.” The Fed is still disappointed that inflation is “below the Committee’s 2 percent longer-run objective,” though.

Another noteworthy thing with regard to inflation is the omission of the parts about inflation being expected to “remain low in the near term, in part because of earlier declines in energy prices.”

This could mean that the Fed expects inflation to improve more quickly than expected. But then again, the Fed did slightly downgrade its inflation projections for this year during the previous FOMC statement, so the revised statements on inflation might be on account of that.

September FOMC Projections (Inflation)

September FOMC Projections (Inflation)

Risks to Outlook

The Fed repeated its previous statement that “Near-term risks to the economic outlook appear roughly balanced.” The Fed als reiterated that it “continues to closely monitor inflation indicators and global economic and financial developments.” Interestingly enough, there was no mention of the U.S. presidential elections.

Final Thoughts

The November FOMC statement was hawkish overall and (arguably) slightly more hawkish than the previous FOMC statement, even though one dissenter ultimately decided to rejoin the majority. Heck, analysts from the likes of Bloomberg, ReutersFortune, the Financial Times, the Wall Street Journal, and CNBC, are even saying that the Fed is gearing up for a possible December rate hike.

The FOMC statement’s effect on rate hike probabilities were kinda wonky, though. Shortly after the FOMC statement was released, the probability of a rate hike surged to within striking distance of 80%. However, the probability of a December rate hike steadily ebbed lower to settle at 66.8%, which is below the previous day’s 68.4% probability, as you can see in the chart below. Whether this was a more informed reaction to the FOMC statement or due to the market still coming to grips with the possibility of a Trump presidency is not very clear, though. By the way, if you have no idea how to read the CME Group’s FedWatch Tool, or have no idea what’s it all about, you can check out my quick primer about it here.

Anyhow, the Greenback’s price action seemed to reflect this wonky effect on rate hike probabilities, since forex traders first tried to buy the Greenback up only to dump it about 10 minutes later, before getting some rather limited follow-through buying later on and then ultimately sliding lower.

USD Index: 15-Minute Forex Chart

USD Index: 15-Minute Forex Chart

How about you? Do you think the most recent FOMC statement is setting us up for a December rate hike? Or do think the Fed won’t be hiking rates at all? Maybe it depends on who the next U.S. president would be, even though the Fed wouldn’t admit it? Share your thoughts by voting in the poll below!

 

 

Bonus: Spot the Difference!

As usual, you don’t actually have to do that since I already did that for you, but here it is, just in case you want to see the actual press statement with the changes highlighted. Do note that words or phrases in red are additions introduced in the November statement while those which have a strike-through are from the previous September release.

Information received since the Federal Open Market Committee met in July September indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid, on average. Household spending has been growing strongly rising moderately but business fixed investment has remained soft. Inflation has continued to run increased somewhat since earlier this year but is still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up but remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has strengthened continued to strengthen but decided, for the time being, to wait for further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action were: Esther L. George and Loretta J. Mester, and Eric Rosengren, each of whom preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.