Federal Reserve Remains on Hold…

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CenterState Bank - Joseph Keating

Joseph T. Keating, Chief Investment Officer

Joseph T. Keating is Executive Vice President, Chief Investment Officer, and Head of Wealth Management for CenterState Bank.  Mr. Keating is frequently quoted on economic and financial market trends in The Wall Street Journal, Reuters, Associated Press, and local newspapers across the nation.

Federal Reserve Remains on Hold, Looks to Hike Before Year End.

The Federal Reserve decided to leave rates unchanged at the conclusion of the September 20-21 FOMC meeting primarily because the committee members saw few signs of an overheating economy. In the policy statement, the FOMC committee members noted that economic activity had picked up from the modest pace seen in the first half of the year, but wanted “to wait for further evidence of continued progress toward its objectives.” However, the central bank teed up a likely move by year end by including in the policy statement, “The Committee judges that the case for an increase in the federal funds rate has strengthened.”

That statement largely repeated the unusually blunt language Janet Yellen used in her Jackson Hole speech in August that “the case for an increase in the federal funds rate has strengthened in recent months.” The FOMC also added to the policy statement for the first time this year that “near-term risks to the economic outlook appear roughly balanced,” meaning the economy had just as good a chance of exceeding the central bank’s growth estimates as of falling short. A balanced risk assessment would be the least positive assessment necessary for the central bank to consider raising rates and was a precursor to the Federal Reserve hiking rates in December, 2015.

Three Federal Reserve regional bank presidents cast dissenting votes at last month’s meeting, highlighting the current division on the FOMC committee over whether the economy currently can tolerate a higher level of short-term borrowing costs. The last time three officials dissented in a rate decision was in December 2014, the first FOMC meeting following the conclusion of the Federal Reserve’s bond buying program in November 2014.

The FOMC committee also lowered its estimates for long run growth and the path of interest rates. The committee members now expect growth of 1.8% to 2.0% per year through 2019, and 1.8% annually over the “longer run,” down from 2.0% in June. Aging populations, growing regulatory burdens, mounting national deficits which make pro-growth fiscal policies less likely, and slower productivity growth are the key reasons behind the lackluster growth projections. The rate projections reflect a substantial shift for the Federal Reserve which had anticipated four rate hikes this year, as well as in 2017 and 2018 back in December. Officials now anticipate only one rate hike this year, two next year, and three in 2018.

The Federal Reserve’s next policy meeting is November 1-2, a week before the presidential election. We see little chance of a move at the November FOMC meeting as the central bank will likely want to keep a low profile in the week before the election. Additionally, there is no regularly scheduled press conference following the November meeting. This leaves the December 13-14 FOMC meeting as the Federal Reserve’s last scheduled chance to raise rates this year. The futures market is currently pricing in a 59% chance of a rate hike in December and only a 19% chance for November.

We look at Janet Yellen’s Jackson Hole speech, last month’s policy statement, and Ms. Yellen’s comments at the press conference following the September FOMC meeting as pointing to a hike at the December meeting if the economic data and the financial markets support the move. Keep in mind, however, that two more presidential debates and the presidential election will take place before the December FOMC meeting.

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