1Finance

Q: Is October on the table?

A: Not really. We believe that Chair Yellen’s baseline since the June meeting has been a December liftoff, and it would be very unnatural for her to pull forward given the information received in the meantime. Besides, there is only one round of monthly economic data on the calendar before then. Last but not least, the logistics are daunting. There will not be a fresh SEP, and the committee would need to announce an impromptu press conference in the October 29 FOMC statement announcing the rate hike itself; an earlier addition of a press conference to the calendar does not work because this would lead the market to conclude that the FOMC has decided to hike, without any room for explanation at that point. This all seems too sudden and dramatic for a Committee that, we think, would like the first hike to be as unexciting as possible.

Q: What could shift the liftoff into 2016?

A: Although we expect the conditions for liftoff regarding employment, inflation, and financial conditions to be in place by December, there is some risk of disappointment in each of them. Missing on any one of them would call December into question, missing on more than one would almost certainly shift liftoff into 2016. Regarding growth and employment, the data looked quite solid until recently but the early information for September has been weak so far. As shown in Exhibit 1, the average of the New York Empire State and Philly Fed index in September fell to the lowest level since the 2011 recession scare, and consumer sentiment also weakened significantly. These are all volatile indicators that could bounce back quickly, but we would put at least a bit of weight on the possibility that they indicate a larger-than-expected drag from the recent tightening in financial conditions and the weakness in global growth.

Finally, regarding financial conditions, our baseline expectation is an easing but the uncertainty is significant as always. And at least so far, the response of the financial markets to the FOMC—especially the sharp selloff in the stock market—has probably disappointed the committee’s expectations.

the source