Last month’s downdraft in equities spooked investors. The fear that is often expressed is that the end of the business cycle may coincide with the end of a credit cycle and a return to 2008-2009 crisis. It seems like an increasing number of economists agree with the sentiment expressed by President Trump that the Fed is too aggressive. Of course, they do not think the president should comment on Fed policy, but they generally concur with the assessment.
To be sure, we continue to track data that points to late-cycle activity, like weakness in interest rate sensitive sectors, such as housing. The 12-month average non-farm payrolls peak in the middle of a cycle and the peak was recorded in 2015, even though job growth remains robust. The flattening of the yield curve typically happens late in a cycle.
However, it is difficult to imagine a much better economic news stream than the US has reported recently. The economy was stronger than expected in Q3 (3.5%) on the heels of 4.2% growth in Q2. Auto sales in October were stronger than expected. The employment report was solid. Not only did job growth surprises on the upside (250k) but average hourly earnings rose 3.1% from a year ago, which is the most since April 2009. The underemployment rate ticked down.
This week is the last of the non-live FOMC meetings, which means that every meeting after November 8 will be followed by a press conference.This has long been due. Since the first hike in December 2015, the Fed only has hiked at meetings with a press conference, which takes place at the quarterly meetings. This reduces the Fed’s freedom of movement and allows speculators to game the market. More frequent press conferences do not mean an acceleration of hikes. The precise timing of the gradual move does become a little less predictable. There is something to be said for strategic ambiguity.
No one expects a hike this week, but an increase next month is highly probable. The CME model points to a nearly 80% chance of a hike in December having been discounted. There is much speculation about the Fed’s statement. Some look the Fed to address topics like the pressure on the effective Fed funds rate, which is now at the rate paid on reserves (2.20%), and maybe slow the balance sheet unwind, which some think is a significant cause.
