Rate Hike on Target for December, But 2017 Timing Remains a Coin Toss

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It is time to get ready, or even more ready perhaps, for a Federal Reserve interest rate hike at the December 14 FOMC meeting. A litany of economic data released on Thursday was stronger than expected. Also, Janet Yellen gave testimony before the Joint Economic Committee of Congress in Washington, D.C. and she was still telegraphing rate hikes on the way.

The economic data showed a stronger core reading on inflation via core Consumer Price Index gains. We also had the lowest level of jobless claims in years. Housing starts were strong, and even the Philly Fed index remained handily above zero.

24/7 Wall St. looked back over some of Janet’s Yellen’s testimony and notes from her Q&A session to find more and more data. After the first interest rate hike in December 2015 took the Fed Funds target rate to 0.25%-0.50% from 0.00%-0.25%, there really hasn’t been any rate change in 2016.

What matters now is that the CME’s FedWatch Tool shows a 90.6% chance of the Fed Funds rate going up to a range of 0.50% to 0.75% in December. That is pretty strong conviction. Still, the odds are close to 40%-YES versus 40%-NO as to whether the Fed Funds rate will be raised by even June or July of 2017.

Some of Janet Yellen’s prepared remarks included some outlook on inflation and the timing of rate hikes. Some of the speech’s quotes were said by Mrs. Yellen as follows:

Core inflation, which excludes the more volatile energy and food prices and tends to be a better indicator of future overall inflation, has been running closer to 1-3/4 percent.

I expect economic growth to continue at a moderate pace sufficient to generate some further strengthening in labor market conditions and a return of inflation to the Committee’s 2 percent objective over the next couple of years.

At our meeting earlier this month, the Committee judged that the case for an increase in the target range had continued to strengthen and that such an increase could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the Committee’s objectives.

Were the FOMC to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the Committee’s longer-run policy goals. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability.

24/7 Wall St. has been given some outside economist commentary as well.

Lindsey Piegza, the Chief Economist at Stifel Fixed Income, offered insight into today’s testimony by Janet Yellen. She said:

The Federal Reserve Chairman Janet Yellen began testifying to the House Joint Economic Committee at 8am ET this morning. Expectedly, the Chairman highlighted the recent “improvements” in the domestic economy – at least relative to extreme weakness in the first half of the year – as well as expectations for continued moderate growth. While stopping short of ensuring a second-round increase at the upcoming meeting just four weeks from now, the Chairman noted a rate increase could come “relatively soon if incoming data provide some further evidence of continued progress toward the Committee’s objectives.” In other words, barring an indication of momentum tilting to the downside, even maintaining the moderate status quo should be enough to sway Committee members in favor of a second-round hike by the end of the year.

Still, however, the Chairman’s reserved comments regarding the intended “gradual” pathway for rates suggest lingering uncertainty surrounding the true health of the U.S. economy and a lack of conviction on the part of policy officials. Not that we ever expect clear, concise comments from any Fed officials, let alone the Chairman herself, but something along the lines of, “gosh darn is the economy strong, heck yeah we’re going to raise rates in December,” would be a refreshing change from the Fed-speak double-talk.

After considering the economic reports and the actual commentary from Janet Yellen, PNC Chief Economist Stuart Hoffman said:

Yellen’s prepared remarks followed by strong economic data for October (including the earlier released data on strong retail sales in October and September supported by strong sales gains just reported by Target, WalMart and Best Buy) all but guarantee a December funds rate hike by the FOMC.  The Fed Funds futures market this morning puts the odds at just over 90%.

After tallying up the CPI report and the stronger housing starts, Stifel’s Lindsey Piegza further said:

As Yellen commented this morning, the Committee is simply looking for further indications of maintaining the current moderate conditions. Coupled with yesterday’s weaker-than-expected rise in producer prices, this morning’s rise in the CPI hardly gives an indication of accelerating price pressures, nor does it however, awaken undo concerns over downside risks to inflation.