Waller Indicates He’s a Hold on a Halloween Fed Hike
Federal Reserve Governor Chris Waller on Wednesday drained some of the drama of the coming Halloween meeting of the Federal Open Markets Committee (FOMC).
Analysts have been debating whether the Federal Reserve would raise rates at its next meeting or continue to hold the benchmark at the range of 5.25 to 5.50 percent set in July. Bank of America’s economics team was still forecasting a hike earlier this week but noting that there was an increasing risk the Fed would hold rather than raise.
The federal funds futures market was pricing in around a 33 percent chance of a hike up until about a week ago. Speeches by several Fed members—12 by the count of Bloomberg’s Mike McKee—indicated an increased willingness not to hike at the October 31-November 1 meeting. The market odds of a hike fell to around 10 percent over the past few days despite data showing higher-than-expected inflation, retail sales, and industrial production.
Data dependency be damned. As of Wednesday, the odds plunged all the way down to four percent, which is essentially the market saying investors have made up their mind that the Fed will not hike the week after next.
Perhaps the nail in the coffin for a November Fed hike was Christopher Waller’s talk in London on Wednesday.
“I will be looking carefully at the data to see whether the real side of the economy begins to cool off or whether prices, the nominal side of the economy, heat up. As of today, it is too soon to tell. Consequently, I believe we can wait, watch and see how the economy evolves before making definitive moves on the path of the policy rate,” Waller said.
The Data Pipeline Is Crowded But Not Consequential
While Waller qualified his view as being only “as of today,” it’s hard to see what could change that view between now and the FOMC meeting. Just take a look at the calendar.
Here is a list of the economic data that will be released in the days leading up to October 31:
- Thursday, October 19: Philadelphia Fed manufacturing survey, initial jobless claims, existing home sales, and leading economic indicators
- Analysis: No amount of upside surprise in the Philly Fed survey is going to change anyone’s view of the national economy. Same with any downside surprises in initial jobless claims. Existing home sales are now their own corner of the multiverse thanks to the lock-in effect of high interest mortgages. We follow the leading economic indicators quite closely, but they’ve been predicting a recession for quite some time and that’s unlikely to change, which means there’s no chance this index convinces anyone to vote for a hike.
- Friday, October 20: Zilch
- Monday, October 23: Chicago Fed National Activity Index
- Analysis: This is not something that will move markets or the opinions of Fed officials.
- Tuesday, October 24: PMI composite flash, Richmond Fed manufacturing survey, and the Fed’s report on money supply
- Analysis: The PMI composite flash report is probably too recent to change the views of Fed officials of overall movements in the economy. The Richmond Fed survey is a great data point about manufacturing, but no upside surprise will convince Waller (or anyone else) that the economy is booming too much for the Fed to hold. The money supply tells us about the effect of Fed policy and should probably not influence that policy.
- Wednesday, October 25: New home sales
- Analysis: New home sales are a small part of the overall housing market, but they punch above their weight economically because building new homes involves a lot of economic activity and labor. Fed officials, however, are likely to see even the biggest upside surprise to this as a mirror image of the lock-in effect that has weighed on existing home sales volumes, and as a result it will not convince them that rates need to be higher.
- Thursday, October 26: Third quarter GDP, jobless claims, durable goods orders, pending home sales, and inventories
- Analysis: If anything were to push Fed officials toward a hike, it would be an upside surprise to GDP. But the Atlanta Fed’s GDPNow is already calling for 5.4 percent, Morgan Stanley sees 4.9 percent, J.P. Morgan forecasts 4.3 percent growth, and Goldman Sachs four percent. Unless we get a number with a six-handle, Fed officials are not likely to revise their views much.
- Friday, October 27: Personal income and outlays, consumer sentiment, and PCE inflation index
- Analysis: We suppose the PCE inflation index could come in with a big upside surprise, but that’s unlikely given what we saw from the consumer price index and the producer price index. If anything, it’s likely that the PCE index will come in a bit softer than the Labor Department’s indexes. It would take a very big upside surprise to change views at this point. The same is true of personal income and outlays, which is unlikely to tell us anything we haven’t learned already from the retail sales figures. Consumer sentiment will likely reflect the mid-month preliminary reading, which means it will not change anyone’s minds.
- Monday, October 29: Dallas Fed manufacturing index
- Analysis: As much as we love our brothers and sisters in the Lone Star State, there’s nothing in this that will change the views of any Fed officials about the overall direction of the economy. Even a big upside surprise will be marked down as a side-effect of higher oil prices.
Waller knew when he gave this talk that it was his last speaking engagement before the Fed goes dark ahead of its meeting. So, the message he is sending here is that he’ll wait until December to push for a hike—at the earliest.
With Waller on the side of the doves for the November meeting, it looks like a lock for a hold.