Next Wednesday, December 19, the Federal Reserve will announce its final monetary policy decision of the year.
Most economists and market watchers expect the central bank will raise the target range for its benchmark interest rate by 25 basis points, its fourth rate increase of the year.
Some economists, however, think that recent disappointing economic data give the Fed a solid case against raising rates next week.
“The consensus overwhelmingly expects a rate hike next week,” said Neil Dutta, an economist at Renaissance Macro in a note earlier this week. “Looking at the Bloomberg News economics consensus, just three of the 60 economists surveyed, just 5%, expect the Fed to hold this month... This conviction feels a bit too strong for our liking.”
Dutta notes that in addition to a November jobs report that doesn’t show an overheating labor market, inflation data have been tame, global growth is slowing, and financial conditions have tightened.
The November jobs report released last week showed the economy added 155,000 new jobs while the unemployment rate held at 3.7%. And though wages grew at a post-crisis high of 3.1%, the labor market’s strength in terms of total hiring continues to show few signs of overheating.
Inflation data out earlier this week also showed that overall cost pressures remain muted with prices rising in-line with the Fed’s goal but not accelerating.
“We see no urgency to hike at the moment,” Dutta added.
But with President Donald Trump having repeatedly attacked the Fed’s policy decisions — most recently saying the Fed would be “foolish” to raise interest rates next week — some think the Fed risks its credibility by altering their forecasted course for rate hikes amid the president’s barbs.
Greg Valliere, chief investment strategist at Horizon Investments, said in an email Thursday that “there are plenty of reasons, we think, for the Fed to skip a rate hike next Wednesday — except for one factor.” That factor is Donald Trump.
“Failure to raise rates [next Wednesday] would be a mild surprise and would lead to inevitable speculation that the central bankers bowed to intense criticism from Donald Trump,” Valliere added. “We don't think Chairman Jay Powell pays much attention to the president, but cynics in the bond market and elsewhere would howl that a stand-pat Fed has become politicized.”
Dutta, however, does not think a Fed pause would harm its credibility and signal to investors that politics are meaningfully influencing its policy decisions.
“Hiking simply because they’ve ‘said they would for a long time’ does not strike us as consistent with data dependence,” Dutta writes. “Credibility is established as the Fed shows a willingness to change its views as conditions in the economy and markets evolve.”
We are most sympathetic to Dutta’s view of the Fed’s credibility.
Saying that the Fed can or cannot make a policy decision based on whether the president is likely to approve of that decision creates a circular logic wherein neither decision allows the Fed to be independent.
Raise rates to actively ignore Trump, and the Fed is political; pause rate hikes to appease Trump, the Fed is also political. This line of thinking simply reveals whatever it is someone wants it to say about Fed policy, rendering the argument meaningless.
The Fed’s political independence is also less about how it sets monetary policy than it is about how it interprets the data that inform that policy.
The Fed’s credibility and independence does not hinge on how it responds to the president because it does not have to respond to the president. That is Larry Kudlow’s job. Because unlike Kudlow— who has argued the federal budget deficit is decreasing even though it is not and insists growth will overcome debt increases — the Fed does not have to spin economic data points to fit a preconceived view of any administration’s economic policies.
And it is because of what the incoming data have told the Fed about the economy since its September meeting that the case for not moving next week is being made.
Now, the market is still telling you the Fed is going to move next week.
According to data from the CME Group, there is a roughly 80% chance the Fed will raise rates next week. Which as far as market pricing is concerned means next week is a done deal.
The Fed’s dot plot forecast of rate hikes next year is likely to be the main event. In September, this forecast indicated the FOMC was split between calling for two or three rate hikes in 2019. A downward shift in the dots would likely be the market mover next week if indeed the path of rate hikes is pared down.
As we shift into this new phase for the Fed — a phase where fewer rate increases are being called for by the Fed’s forecast and the end of this rate-hiking cycle comes into view — there will be increasing noise about whether Trump is meddling in the Fed’s affairs. But as is the case with almost all discussions about the president, what you think is going on says more about you than it does about whatever is happening.
So those who intend to argue in the year ahead that the Fed is being pushed around by Trump, or that the Fed is pushing back against Trump, were inclined to think that anyway. And thus miss the mark when it comes to understanding what the Fed is doing and why.
A version of this story was originally published on Dec. 13, 2018.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland