Middle-east Arab News Opinion | Asharq Al-awsat

Fed Raises Expectations of a Post-Election Hike | ASHARQ AL-AWSAT English Archive 2005 -2017
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No surprise for Wall Street.
Photographer: Michael Nagle/Bllomberg

As predicted, the Federal Reserve refrained from any new policy measures this week. In doing so, it avoided being subjected to uncomfortable political scrutiny just six days before the U.S. presidential election. Yet through words and its members’ vote, the central bank took a step in validating the high market (around 70 percent) expectations for a rate hike in December.

The Fed acknowledged that the economic case has strengthened further for what would be the first rate hike since December of last year and only the second in the last 10 years.

Labor market conditions have continued to improve, as job growth is finally being accompanied by somewhat stronger wage increases. Inflationary expectations have been ticking up, especially when measured by market indicators such as the “break-even” levels in the market for Treasury Inflation-Protected Securities. And there have even been growing signs of recognition among officials of the risk of future financial instability as a byproduct of the prolonged period of ultra-low rates — though the Fed might not wish to dwell on this point.

This is occurring even as the Fed has attracted political attention that, I suspect, it considers unfortunate. In a rather bizarre election season, the central bank has been accused of showing political bias, in particular by Republicans. Meanwhile, some on the other side of the political aisle have urged it not to make waves so close to a pivotal election. That’s why the Fed was hoping the Federal Open Market Committee meeting this week would be a non-event. It essentially succeeded by announcing no new policy measures.

Judging from the summary statement — we will get greater insights when the minutes are released in a few weeks — this meeting is best thought of as a holding operation.

The Fed acknowledged the strengthening case for a hike, noting both the continued improvement in the labor market and the prospects for slightly higher inflation. But it also kept its policy options open, and understandably so. Between now and its mid-December meeting, officials will need to assess the impact of the elections and the implications of two monthly job reports, as well as monitor developments abroad (most notably in Europe and China).

The decision speaks to a broader context I described earlier this week. Despite an inclination to undertake policy actions, central banks on three continents are being sidelined by circumstances. They may also be signaling to markets a gradual decrease in both their willingness and ability to carry out the actions that have served investors so well until now: repressing financial volatility in a global environment marked by unusually uncertain economic, financial, institutional and political conditions.