November flashlight for the FOMC blackout period

(Wells Fargo Research Team)

Summary

We look for the FOMC to deliver its fourth consecutive 75 bps rate hike at the conclusion of its meeting on November 2. Inflation continues to run much too hot for the FOMC, and the labor market remains extraordinarily tight.

The odds of a 100 bps rate hike on November 2 are low, in our view. Although some Committee members may favor a 100 bps hike, an increase of that magnitude does not appear to be a consensus view.

Financial markets have become volatile in recent weeks, raising some questions about the outlook for Fed policy. But we think the probability is low that the FOMC will opt for a rate hike that is less than 75 bps. The market is fully priced for 75 bps, and most Committee members believe that financial markets are generally functioning properly at present despite its recent volatility.

In our view, the most important aspect of the November 2 FOMC meeting will be how the post-meeting statement and press conference frame policy considerations ahead. The FOMC could begin to stress the cumulative effect of tightening, which could signal that it is preparing to shift to a slower pace of rate hikes in the meetings ahead. Indeed, we are starting to hear more caution slip into the remarks of some Fed speakers.

Along with our estimates for key inflation and jobs data to soften ahead of the December meeting, the more cautionary notes we are beginning to hear from some policymakers leads us to expect that the November meeting may very well deliver the last 75-bps hike this cycle, and that the Fed is likely to step down to “only” a 50 bps hike in its final meeting of the year.

The Fed’s barrage on inflation continues

Anyone hoping that the FOMC’s barrage of 75 bps hikes would come to end by now likely will be sorely disappointed at the conclusion of the FOMC’s upcoming meeting on November 2. We expect the FOMC will deliver its fourth consecutive 75 bps hike next week, bringing the fed funds target range to 3.75-4.00%.

Fed officials all appear to be on the same page: inflation remains much too high, and risks are still skewed to the upside. For months now, Committee members, including Chair Powell, have been looking for “compelling evidence” of inflation moving down. That evidence has yet to materialize. All three of the major U.S. inflation indices—the Consumer Price Index, PCE deflator and Producer Price Index—surprised to the upside in their most recent prints. Most glaringly, the core CPI advanced another 0.6% in September, consistent with a 7.1% annualized rate of price growth and above both the 3-month and 12-month pace (Figure 1). Notably, the strong upturn came from services inflation picking up further speed, which more than offset the highly-anticipated softness in goods prices. All in all, the trend in inflation has yet to turn, let alone approach a level at which the Fed could be reasonably comfortable.

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