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Several Views of the ‘Will They, Won’t They’ FOMC Rate Hike Decision

Everyone is still talking about whether the Federal Reserve will raise the fed funds rate in the next week. Wednesday, September 16, will mark the start of the Federal Open Market Committee (FOMC) meeting. What matters about this meeting versus many other meetings is that there is the formal FOMC statement. There also will be the release of the updated FOMC forecasts, and then there will be a Federal Reserve press conference in which Janet Yellen will come out to defend or explain whatever action was or was not taken.

With so many investors looking for any data and opinion they can get their hands on, 24/7 Wall St. wanted to give a basic preview with both internal and external expectations.

As of Friday, and after the day’s economic data on consumer sentiment and on the producer price index (PPI) were released, the CME’s fed funds futures is not pricing in anywhere close to a 100% expectation for a rate hike. Its pricing after the 10:00 a.m. Eastern Time was seen at 99.8375 — and that reading would have to be at or under 99.7500 for there to be considered a 100% chance of a formal rate hike. On that front, the fed funds futures were close to a 100% chance at 99.76 for November.

The first formal month of a 100% chance was December, with a 99.72 price. Fed funds futures are far from perfect. They matter because these are real-money financial commitments made by bankers, financial firms and speculators all positioning for interest rates.

ALSO READ: 3 Merrill Lynch Bank Stock Picks to Buy for Coming Interest Rate Increases

24/7 Wall St. has received an update from Lindsey Piegza, the chief economist of Stifel. She commented on Friday’s PPI and consumer sentiment readings and showed that the focus on inflation is what likely will be the driving force for next week’s FOMC meeting.

Piegza’s view is that inflation continues to evade the Fed’s longer term target of 2%. Headline wholesale prices have been close zero or below for eight consecutive months, and the core PPI is up just 0.9% over the past 12 months. She said:

While the debate over the health of the US labor market rages on amid a further decline in the civilian unemployment rate juxtaposed with still-heightened broader measures of joblessness, the question over inflation pressures — or lack thereof — is crystal clear. At this point, the question is not when inflation will reverse course back to 2%, or whether Committee members are reasonably confident inflation will begin to head back towards the longer term target. No, the more appropriate question for policy makers to consider at next week’s meeting is: what inflation? With sluggish global demand and rapidly declining commodity prices, further price depression — not pressure — appears to be evident in the pipeline. There is no doubt inflation will be a point of contention. … The drop in consumer sentiment is simply the latest in a long list of weaker-than-expected economic data leading into the September rate decision.

Another view seen was from Goldman Sachs. While the firm might have stepped out on a limb by noting that oil could fall into the $20s, Goldman Sachs wants to remind its clients that the only move that should be expected is a 0.25% hike. Their take is that the markets have done the Fed’s hiking work for it, and the larger issue is how and when rates will move back toward a real normalization.

ALSO READ: Richmond Fed’s Lacker Wants Rate Hike ‘Sooner Rather Than Later’

Goldman Sachs is of the opinion that the equivalent of about three interest rate hikes have already been priced into the markets. Their view is that financial conditions today are reflective of a scenario where fed funds were in a 0.75% to 1.00% target range. Goldman Sachs also sees the Fed being able to stand pat without formally raising interest rates until at least December, which coincides with fed funds futures mentioned above.

By Jon C. Ogg