No Hike November

by Ryan Detrick, LPL Research

The Federal Reserve’s (Fed) latest meeting started on Halloween, but the outcome wasn’t scary for markets. As was widely expected, the Fed made no changes to monetary policy during its October 31–November 1 meeting. The fed funds target rate remains between 1.0% and 1.25%, and the Fed will continue to allow $10 billion of maturing mortgage-backed securities (MBS) and Treasuries to roll off its balance sheet each month, which will increase by $10 billion every three months until reaching a maximum of $50 billion. The next scheduled increase will take place in January (read more about the Fed’s balance sheet normalization plans here).

The tone of the Fed’s statement also didn’t change much from its September meeting (here’s a side-by-side comparison). The Fed’s view on household spending and business fixed investment remained positive. September’s employment report showed a small drop in nonfarm employment (-33,000) but the Fed attributed this to the impact of the hurricanes. The statement indicated that “hurricane-related disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term,” but impacts are unlikely to alter the trajectory of the economy in the medium term. The Fed also noted that higher gasoline and food prices in the wake of the hurricanes led to a small boost in inflation, but again, members expect the effects to be temporary and for inflation to remain soft in the near term before it stabilizes near the Fed’s 2% target.

While the Fed meeting was uneventful for markets, the next 24-48 hours may be more impactful. President Trump is expected to announce his pick for the next Fed chair on November 2 (see our recent Bond Market Perspectives, “Will Hawks Take Control in 2018?” for more information). Market impact may be limited if Jerome Powell, the current frontrunner, is chosen given that his monetary policy views are similar to those of current Fed Chair Janet Yellen, which would imply that the Fed’s monetary policy stance would likely not change dramatically. However, a more hawkish selection of John Taylor or Kevin Warsh could mean that rates move higher in the aftermath of the decision on expectations of a more aggressive rate-hike campaign.

Following the Fed chair news, the next policy meeting for the Fed will take place from December 12–13. This meeting is likely to be more significant for markets, as it will include updated economic projections, dot plots, and a press conference. Following today’s announcement, fed funds futures markets continue to price in a strong chance (88% according to Bloomberg calculations) of a rate hike at the December meeting.

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IMPORTANT DISCLOSURES

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Mortgage-backed securities are subject to credit, default, prepayment risk that acts much like call risk when you get your principal back sooner than the stated maturity, extension risk, the opposite of prepayment risk, market and interest rate risk.

This research material has been prepared by LPL Financial LLC.

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