Even with the latest market sell-offs occurring in U.S. equities, the general consensus in the capital markets is that a rate hike will be announced by the central bank in December, but the decision will also hinge on data, judgement and a little extra, according to Federal Reserve Vice Chairman Richard Clarida.
“A monetary policy strategy must find a way to combine incoming data and a model of the economy with a healthy dose of judgment — and humility! — to formulate, and then communicate, a path for the policy rate most consistent with our policy objectives,” said Clarida, as he delivered a speech to New York bankers.
Not long ago, it seemed that a fourth and final rate hike to cap off 2018 was a sure thing, but the sell-offs in October and its spillover into November may have caused the Federal Reserve to take on a more dovish tone heading into December.
Currently, the CME Group’s FedWatch Tool, an algorithm that calculates the probability of a rate hike in a given month, is showing a 79.2% chance the Federal Reserve will institute a fourth rate hike for December. Nonetheless, the latest comments from various Fed members might be signaling otherwise.
Bears and Doves Abound
Just as the bears appear to be reigning in the capital markets, the doves may start to be appearing as 2018 comes to a close. For example, Federal Reserve Chairman Jerome Powell exhibited signs of cautiousness as he discussed the economy at a symposium with Dallas Fed President Robert S. Kaplan earlier this month.
“So, you know, a good example is — a noneconomic example would be you’re walking through a room full of furniture and the lights go off. What do you do? You slow down. You stop, probably, and feel your way,” Powell said.
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In the meantime, Federal Reserve Bank of New York President John Williams is keen to sticking with hiking rates–somewhat.
“We’ll be likely raising interest rates somewhat but it’s really in the context of a very strong economy,” Williams said at a community event in New York on Monday. “We’re not on a preset course. We’ll adjust how we do monetary policy to do our best to keep this economy going strong with low inflation.”
Meanwhile, Clarida was recently on a CNBC segment, stating that signs of slowing are beginning to materialize in the global economy. It isn’t just the comments themselves as some analysts are noting that the timing of the latest comments come just a month away from December’s interest rate announcement.
“The market is perceiving them as being more dovish…It’s a small pivot because they’re acknowledging the idea that when you get closer to the end of a hiking cycle you have to feel your way through. You want flexibility. It doesn’t mean they have to stop soon,” said George Goncalves, head of fixed income strategy at Nomura.
In an interview with the Wall Street Journal this month, Federal Reserve Bank of Philadelphia President Patrick Harker was outright convinced that a December rate hike is not the most optimal move given the latest rumblings in the markets.
“At this point, I’m not convinced a December rate move is the right move, but I need to watch the data over the next few weeks before determining whether it is prudent to boost the cost of borrowing again.”
Despite the latest comments from his colleagues and recent volatility roiling the capital markets, Clarida maintains that the economy is still robust.
“U.S. economic fundamentals are robust, as indicated by strong growth in gross domestic product and a job market that has been surprising on the upside for nearly two years,” Clarida said.
For more trends in fixed income, visit the Rising Rates Channel.