Economy

Rationale for Rate Hikes Continues to Sink Into January FOMC Meeting

Jon C. Ogg

Published: January 27, 2016 12:35 pm

Last Updated: January 13, 2020 2:30 pm

With the Federal Open Market Committee (FOMC) decision on interest rates due around 2:00 p.m. Eastern Time, the markets remain cautious. It seems very unrealistic, or like too much of a risk, that Fed Chair Janet Yellen and the Federal Reserve presidents would vote to raise interest rates now. After all, a “gradual rate hike forecast” that the Fed presidents have all indicated should not mean two consecutive meeting hikes in a row.

Where the devil will be is in the FOMC’s statement. It is the statements rather than the actual fed funds rate remaining on hold that will hurt. It also seems that the consumer confidence and consumer sentiment may be outliers, with those remaining positive in January. The financial market turmoil hasn’t bled over there yet, but those consumer opinion polls ended before the stock market’s lows in January.

Note that the Fed is still hanging on to the notion that it will be data-driven and methodical in its rate hikes. It knows that economic data are weak, and the Fed is doing whatever it can to get back to a normalized interest rate environment.

Two key reports are not available ahead of the FOMC’s decision. That being said, the Fed members almost certainly know what those numbers will be. If not a formal number, they are definitely aware of what direction those numbers look like. The first is Thursday’s durable goods report, with Bloomberg looking for a 0.2% gain in December (flat, excluding transportation). The second key report is coming on Friday and offers the first look at fourth-quarter gross domestic product (GDP). Bloomberg is calling for a 0.9% gain, versus a 2.0% gain in the third quarter. Even the GDP price index is expected to be up 0.9%.

So, what other economic reports have hit that the Fed will be paying attention to? Again, most Fed presidents and talking heads have promised over and over to remain data-dependent, even if they are biased to raise interest rates.

The purchasing managers index (PMI) and Institute for Supply Management (ISM) readings have been mixed, with more cautionary tones. The pricing pressure seems to be heading back down as well, with input costs dropping again and with transportation numbers looking weak.

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