Monday, November 7, 2016

Fed Speech Late Friday: This One Will Throw Markets For A Loop

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*Fed Vice Chair Stanley Fischer gave a speech which can act as a post FOMC statement.
*The Fed gave more clarity that a rate hike is coming in December.
*They also said they are considering letting inflation run which has longer term risk implications to markets.

The FOMC statement did not give timing for the next hike. On Friday however Fed Vice Chair Stanley Fischer did specifically point to December. The speech was packed with a big surprise that more officials agree with letting the economy run hot. That is worse for bonds but it could ultimately drag stocks.
Hike Coming In December Now That The Fed Has The Street's OK
First, here's what the Fed Vice Chair said:
"As was noted in the Federal Open Market Committee's statement, our assessment is that the most recent data have further strengthened the case for increasing the target range for the federal funds rate. The markets put a probability of above 70 percent on the rate being increased in December."
While the Fed did not cite December in their FOMC statement, Fischer did directly point to December. That's a strong statement that there will be a Fed Funds rate increase in December.
Here's what the Fed said in their FOMC statement ahead of the December 2015 rate hike:
"In determining whether it will be appropriate to raise the target range at its next meeting..."
In the FOMC meeting preceding their December 2015 meeting they specifically mentioned timing. The Fed Vice Chair did a similar move Friday at 4PM. The Fed mentioned the December meeting specifically and also called-out that the street has approved a hike. That was an important ingredient missing in previous decisions.
We wrote in September, "The Fed Can't Hike Without The Stock Market's OK." The Fed constantly looks at the Fed Funds futures to determine if the market is ready for a monetary policy adjustment.
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