FOMC has surely laced the October meet with a hawkish tone…

The absence of a rate hike in the FOMC October meet was not a surprise. The Fed was never supposed to hike rates in October. But the October FOMC meet was important because it was to lay the foundations of the December meet. Hence the outlook and the guidance in the October meet were keenly awaited.

The language and the commentary of the Fed post the FOMC meet has surely been hawkish. While there is no clear time table of rate hikes, the stage seems to be set for a rate hike in December this year or at least in the first quarter of 2016.

Economy is picking up…

The Fed commentary on GDP growth and labor markets has been quite hawkish. On the GDP front, the Fed has expressed confidence in the growth rates sustaining closer to 4%. Although the September jobs data has been weak, the Fed has reiterated that the US economy is as close to full employment as is practically possible.

While the Fed has acknowledged a slowdown in exports, it has also noted the aggressive growth in household spending, business fixed investments and housing growth. That is hawkish!

Inflation is below targets…

One of the key metrics of the Fed, Inflation, is still well below the mandated level. The Fed has been talking about an inflation rate of 2% for a rate hike to be justifiable. But the rate of inflation has been consistently below that. To an extent the weakness in the price of oil and gas has been responsible. Similarly, the prices of non-oil imports have also gone down sharply, keeping inflation in check.

However, current commodity inflation may be more of an outlier. If you adjust for the transitory effects of cheap energy, then inflation may be much closer to the 2% target of the Fed.

Global risks underplayed…

This was probably the biggest take-away from the FOMC October meet. The Fed has decided to underplay the global risks implied in a rate hike. In the previous two FOMC meets, the Fed had dwelt extensively on the risks to global GDP growth, capital flows and bond markets as a result of the Fed rate hike. This time around, the global risks have been largely underplayed. It probably implies that China, EU and Japan may not overtly impact the Fed decision in December 2015 when it meets next.

The underlying tone of the FOMC commentary surely seems hawkish. A growth story with no reference to global risks is perhaps a signal to the global financial markets. “Expect a rate hike in December or early 2016 and better prepare for it”. Touché! ©

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