Will The Fed Do the Old Switcheroo?

So the Fed, no surprise here, decided to keep rates unchanged in its penultimate meeting for the year. The Fed also noted that it will decide whether it will raise rates in December — since the Fed mentioned December many analysts have placed a lot into this statement and now think that December is a real possibility. Even though December is a strong possibility, it’s not so clear cut.

For one, perhaps the pressure of the Fed to raise rates is starting to diminish as the economic gloom resonates in the air. After all, the U.S. economy isn’t progressing at the same speed it once did. The transitory effect of low oil prices may not be so transitory and could be keep down inflation. True, the Fed is looking at the core CPI and not CPI and the former is close to 2% — in the last report the core CPI reached 1.9%. The Fed is still contemplating whether December is the right time to raise rates or it may, in hindsight, be a bad call as the one Jean-Claude Trichet, former ECB President did back in 2011. To keep close tabs on inflation is one thing. And the Fed should be ahead of curve and prevent a possible rise in inflation to really high levels. But the 2015 global economy isn’t the same it was a decade earlier. All major economies have low rates, falling oil prices and expected economic slowdown. And except for the UK all other major central banks are in the process of expanding their monetary policy.

I think the Fed is keeping us guessing mainly because the Fed members are on the fence. They are still more likely to raise rates this year, especially if the core CPI were to start rising again, the labor market doesn’t show any more signs of slowdown, and the global economic conditions don’t deteriorate any further. There is also a small possibility that the Fed is doing the old switcheroo maneuver, in which they are telling us December is the date of liftoff if there are no major bad surprises along the way. And then, if the economic climate doesn’t change by much from current conditions (unless of course we had seen core CPI climb to 2.5% and jobs gain at a pace of 300K per month), the Fed will maintain its rates and promise to reconsider in Q1 2016. For now, December is the save the date rate hike possibility, and it will be harder for the Fed to back out of it, if nothing new happens.

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