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The Fed meeting in November was never expected to provide ground-breaking news. The FOMC does not make statements without an accompanying press conference and the dot plot, even though they insist that every meeting is a live one.

However, this meeting could cement the decision to raise rates. In the unlikely event that they do not provide a smoking gun for a hike, the dollar could crash as such an outcome is not priced in.

Here is a preview for the November 1st Fed decision:

4 reasons to hike in December

And to make sure we know about it on November 1st.

  1. Because they hinted they would do it: The dot-plot from the September meeting sees one more hike in 2017. Yellen acknowledged lower inflation but is still confident about a hike. Dudley, which used to be a dove, seems keen on raising rates. There are very few doves such as Kashakri  which may dissent or Bullard, that does not even have a vote.
  2. Strong growth: GDP growth stood at 3.1% annualized in Q2 and 3% in Q3 according to the initial figure. This is above the “new normal” and in theory, stronger growth implies higher inflation down the road.
  3. Upbeat employment: Everybody sees through the hurricane-impacted jobs report for September. The general picture remains of solid job gains in all fields. Employment is half of the Fed’s mandate and Yellen leans more towards this mandate than the inflation one.
  4. Yellen’s last stand: According to all the reports, Yellen will not continue as Fed Chair. Trump wants to “make his mark” and is likely to appoint Jerome Powell on Thursday. While Powell may not be that different from Yellen, the outdoing Fed Chair will want to leave a clean slate and raise rates as widely telegraphed rather than making a last-minute change. A pre-announcement in November of a no-hike is “last-minute” in Fed terms.

Bond markets are pricing in a rate hike in December and November’s meeting will most probably confirm that. In this case, the dollar could tick higher, but we cannot expect any huge move.

How can they cement a December hike? They can mention raising rates in the “upcoming meeting” as they did in the past. In addition, sounding upbeat about the economy could be sufficient. If their forecasts are not altered, their plan isn’t altered either and the dot-plot means a December hike.

Why would the Fed NOT hint a hike?

There is a clear caveat in the reasons to raise rates or an elephant in the room: inflation. The Fed’s favorite measure of inflation, the Core PCE Price Index, is stuck at the low end of 1.3% y/y. This is too far from the ever-elusive 2% target. Core CPI is stuck at 1.7%.

Fed members expressed concern about it and Yellen even called it a “mystery”. Is this enough to stop the hike? It doesn’t seem so, given all the reasons above.

The outlier scenario is that the Fed focuses on low inflation in the statement, expressing deep concern. In addition, they may take the hurricane damage seriously and most importantly, let us know they are not sure about December just yet. Incoming data from now until mid-December includes two jobs reports, updated inflation measures and also updated GDP figures.

In this case, the dollar will plunge across the board and the decision to raise rates will await the next Fed Chair. Low probability = big move.

What do you think?

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