The Halloween window is shut, making it inappropriate to describe participants at the next meeting of the Federal Open Market Committee (FOMC) as mindlessly shuffling into a lifeless event. But they are. Federal (Fed) Reserve Chairman Jay Powell’s favorite phrase is that he intends “to stay in his own lane,” which must be reassuring to everyone along bicycle paths in his hometown of Chevy Chase, Maryland, and makes predicting the outcome of the upcoming meeting easy. The FOMC has narrowed its policy lane to one action per quarter that is advertised in advance in the statement and minutes of the prior meeting. The every-other-meeting calendar makes November an orphan, and one without a press conference to provide the stage to explain deviating from the schedule.1
Market participants have seen this movie before, which is why the November fed funds futures contract puts over 95 percent probability weight on inaction (as in upper chart). What matters is what they say about their next meeting, scheduled on December 18 and 19.2 We believe the Fed will queue up a quarter-point hike, to be followed by three more next year. Futures contracts suggest about a 70 percent chance of action then. The unsteady climb up in that probability (as in the lower chart) retraced from the almost-certain belief of last month, most likely due to the equity market selloff. It was not economic data, which mostly surprised to the upside and are consistent with the continuation of above-trend growth that intensifies excess demand. True, the stock market correction dented financial conditions, but they remain in accommodative territory, on net. Besides, the Fed’s intent is to limit overshooting inflation.
1Chair Powell indicated that he will hold a press conference at every meeting starting next year, so this will be the last time the FOMC stays silent about its policy.
2Note to self: Preposition for "The Grinch Who Stole the Expansion" meme