Will There Be A November Surprise?

In its most recent Beige Book, covering late August through early October, released last week, the Federal Reserve noted that although economic “outlooks are positive, contacts in several sectors cite the upcoming presidential election as a source of near-term uncertainty, delaying some business decisions.”

The same could be said for the Fed itself. How much uncertainty has it created and business decisions has it delayed by its endless dawdling and indecisiveness on whether or not to raise interest rates? No matter who wins the vote, the election will end – maybe not on November 8, if it can be shown that someone did, in fact, rig the voting – but eventually, Donald Trump or Hillary Clinton will become president. But we have no such certitude that the Fed won’t continue to tease the markets about when it will start normalizing monetary policy.

The Fed’s next FOMC meeting will be held next Tuesday and Wednesday, when at 2:00 PM Eastern time it will announce its rate decision. Most people, myself included, believe the Fed will take a pass in deference to Election Day, which takes place less than a week later. But there’s no assurance that the Fed will do anything at its meeting in mid-December, either.

Perhaps the Fed should come up with a new strategy. Rather than waiting for the end of each meeting to announce its decision, which becomes effective immediately, maybe it should instead announce at the November meeting that it will raise rates effective after the next meeting, to save everyone the continued suspense of wondering what is going to happen.

Is that not the way just about every other government edict is handled? Of course, it is. If taxes are going to be raised, the IRS provides months of forward notice what the new rates are going to be and when they go into effect. When new regulations are set to go into effect, businesses are given months, sometimes years, of notice so that they can plan accordingly. The same thing happens in the private sector. Health insurance companies, for example, give their business customers months of advance warning before rates are set to increase, by how much and when.

Why can’t the Fed do the same? Instead, the financial markets, consumers, and businesses are held in a constant state of not knowing what exactly the future holds, making it very difficult to plan.

Right now, the timing of the Fed’s next rate move is still up in the air, and the most recent reports on the U.S. economy don’t provide much of a hint. Indeed, the economy doesn’t appear to be any stronger now than it did six months ago, so there’s no reason to believe that the Fed will do anything for the remainder of the year.

Let’s look at some of those recent reports covering the whole economy.

The Fed itself, in last week’s Beige Book, continued to say that the economy is growing in most Fed districts at a “modest or moderate pace of expansion,” virtually the same language it has been serving up for months on end.

The Chicago Fed’s national activity index was once again in negative territory in September, minus 0.14. The August figure was revised even lower, to minus 0.72 from an original reading of minus 0.55. The index has now been in negative territory, indicating growth below the historical average, for 16 of the past 21 months, dating back to January 2015.

On Friday, the government releases its “advance” estimate of third quarter GDP, which the consensus Street forecast is calling for 2.5% annualized growth. That seems a bit of a stretch, considering that second quarter growth was just 1.4%, and government statistics since then have been showing lackluster growth, as evidenced by the previous two paragraphs. The Atlanta and New York Feds, respectively, are calling for 2.0% and 2.2% growth, which also seem overly optimistic.

None of those statistics warrant a rate increase, based on the Fed’s past reasoning.

Of course, the wild card is the growing pressure within the Fed to raise rates. As we know, three of the Fed’s 10 voting members voted for a rate increase at the previous meeting in September, up from one previously.

Since then, Fed Vice Chairman Stanley Fischer raised some hopes – mine, anyway – that he might join that group, and, considering his position and influence, might persuade even more. At the Economic Club of New York on October 17, he gave a talk entitled “Why Are Interest Rates So Low?”

“Now, I am sure that the reaction of many of you may be, ‘Well if you and your Fed colleagues dislike low-interest rates, why not just go ahead and raise them?” he began. “You are the Federal Reserve, after all.”

But then he proceeded to dash any hopes that he was leaning in that direction, noting that “it is not that simple.” Whenever a policy maker or person in authority uses a phrase like that, it’s just a long-winded way of saying “No.”

So, I’m afraid; the Fed is likely to leave us in suspense once again after next week’s meeting, and maybe after December’s meeting, too. Let’s at least hope we’ll know who the new president is by then.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.