Coverage: Fed sets itself up for December rate hike

The Federal Reserve Board kept interest rates stable during its Federal Open Market Committee meeting Wednesday, but it set up the distinct possibility of a rate hike at its December meeting.

Christopher Condon of Bloomberg News had the news:

Fed officials revealed growing confidence that inflation is on track to reach their 2 percent target. The central bank said Wednesday that the pace of price gains “has increased somewhat since earlier this year” and that market-based measures of inflation compensation “have moved up.” The committee also omitted previous language saying inflation would probably “remain low in the near term.”

“Given the asymmetry of risks, there was little chance they would hike in November, their earliest opportunity and a meeting without a press conference” by Fed Chair Janet Yellen, said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York. The presidential “election is a secondary consideration, in my view.”

The decision to forgo a rate increase had been widely expected owing to the proximity of next week’s U.S. presidential election and the lack of a scheduled press briefing after this meeting. Now the focus will shift to the FOMC’s gathering in December, provided the outlook for the economy and inflation isn’t thrown into doubt over the next six weeks.

This month’s statement said the Fed would wait for “some further evidence” of progress in the economy before raising rates, adding the qualifier “some” to language from September, a sign that officials moved incrementally closer to a hike.

Chris Matthews of Fortune reported that the Fed statement shows it’s influenced by politics:

Though Fed chair Janet Yellen has been at pains to convince the public that politics plays no role in the FOMC’s decision making, the choice to stand pat this time around seems to have a lot to do with the election. As Vincent Reinhart, former head of the Fed’s monetary-affairs division and chief economist with Standish Mellon, predicted last week, the Fed would not act this week because not only do markets affect politics, but politics affect markets. Given that markets will naturally react to next week’s presidential election, it only makes sense for the Fed to wait and gauge that reaction before making its next move.

In fact, Reinhart argued that the Fed should have just moved this week’s meeting altogether, writing that such a meeting is “useless” just days before the polls open. But that would “lift the cloak of denial that Fed officials never look at the political calendar,” Reinhart wrote, suggesting that Fed economists would be afraid of how the public would interpret a rescheduling.

Another clue that the FOMC board members are particularly concerned about timing rate hikes is the fact that Boston Fed president Eric Rosengren joined the board members who wanted to keep rates where they are. Just two months ago, Rosengren dissented along with fellow members Esther George and Loretta Mester, voting against the majority and in favor of letting rates rise. Given that he has publicly said that he fears that keeping rates too low will necessitate much more aggressive, and therefore dangerous, rate hikes later, it seems that Rosengren’s vote shows how some members opinions can be changed by a meeting’s proximity to important political events.

Binyamin Appelbaum of the New York Times noted the Fed’s upbeat language:

The Fed’s assessment of economic conditions was also just a little more upbeat than the September statement. The most significant change reflected evidence of stronger inflation. The November statement said inflation “has increased somewhat,” rising closer to the Fed’s preferred annual pace of 2 percent.

The health of the economy has continued to improve. The unemployment rate stood at 5 percent in September, close to a historically normal level. Inflation rose 1.2 percent over the 12 months ending in September, up from 0.8 percent during the 12 months ending in July. And the economy expanded at an annual pace of 2.9 percent in the third quarter.

Two Fed officials dissented. Esther L. George, president of the Federal Reserve Bank of Kansas City, and Loretta J. Mester, president of the Federal Reserve Bank of Cleveland, both voted to raise rates a quarter-point. But Eric Rosengren, the president of the Federal Reserve Bank of Boston, who voted to raise rates in September, this time voted with the majority.

Mr. Rosengren said before the meeting that he did not see much difference between raising rates in November and raising rates in December, suggesting he was willing to wait a few more weeks for the Fed to act.