Moves in longer Treasury maturities were less pronounced, as long-term yields are less vulnerable to a Fed rate hike. But markets were alarmed that in the carefully worded statement issued at the end of the two-day meeting, Federal Reserve officials specifically mentioned the possibility of a rate rise at their December meeting.
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Only one FOMC member voted for a rate rise during October’s meeting.
It presented a rosier view of the economy than it had last month, highlighting “solid” increases in consumer spending – the key driver of the economy – and business investment.
But the Fed warned that the pace of job gains has “slowed”, while the unemployment rate held steady. Federal Reserve Bank of Richmond President Jeffrey Lacker even published a dissension last month after his colleagues opted out of a September rate hike.
Image: Fed chair Janet Yellen and the central bank are “monitoring global economic and financial developments” leading up to December’s session.
“Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year”, the FMOC said. “At this point, it is quite clear the economy has decelerated sharply during Q3, with tomorrow’s GDP print likely coming in around 1.5% annualized”, says TD Economics.
The initial market reaction was that the statement was at least moderately more hawkish, with a few focusing on language indicating the factors the Fed will consider “in determining whether it will be appropriate to raise the target range at its next meeting”.
That decision was in line with what economists had been expecting, but a small minority of watchers thought it was possible that America’s central bank might slightly hike lending rates at either this meeting or the next one in December.
A stronger greenback makes gold more expensive for holders of other currencies, while higher rates also hurt the metal’s appeal. It also downplayed global economic headwinds in its statement. “It has to be immensely frustrating…The global economy is still decelerating and we’re seeing a softening of growth domestically”.
Thomas Simons, money market economist at Jefferies, said most Fed officials want to get off zero and the two governors “may not have wanted to rock the boat”. “Some combination of payrolls, unemployment and wages signalling continued improvement will be enough; we’re leaving December as our base case, though it is by no means a done deal”.
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Market participants had been expecting the committee to raise rates right up through August, then changed course as the economy weakened, the stock market plunged into correction territory, and fears escalated that global weakness would spread.
