The stock market heaved a massive sigh of relief in late September when the Federal Reserve decided not to raise its target for the interest rate banks charge one another for short-term loans, known as the federal funds rate. But between Nov. 1 and Nov. 2, the Federal Open Market Committee (FOMC), which determines the Federal Reserve’s monetary policy stance, will meet once again to decide whether or not to increase the federal funds rate from its current range of 25 to 50 basis points (bps), or 0.25 to 0.5 percent.
Will the FOMC the long-awaited adjustment this time around, or will the group—which consists of the Fed’s Board of Governors, the president of the New York Fed and four rotating regional branch presidents—push off a rate hike until its next meeting, in mid-December? Analysts are predominantly forecasting the latter outcome.
In a poll by the CME Group, more than 90 percent of respondents predicted the Fed would maintain the current federal funds rate level of 25 to 50 bps, compared to slightly over 9 percent who expected the rate to rise to between 50 and 75 bps. As for the result of the December meeting, more than two-thirds forecasted a rate hike to between 50 and 75 bps, compared to a quarter who believed the rate would remain at its current target and less than 7 percent who expected the rate to rise to between 75 and 100 bps.
Despite three regional Fed presidents’ claims that it's time for an increase, futures traders saw the chance of a rate hike as one in five, according to Bloomberg.
The decision ultimately comes down to economic indicators. After the September meeting, the FOMC announced that, while the job market saw decent growth and the housing market has picked up, cheap oil has kept inflation below the 2 percent target and “business investment has remained soft.” In other words, before the Fed tightens the economy with this more conservative monetary policy measure, U.S. markets need to be humming along strongly.
But the likelihood that economic conditions have hit what the Fed deems a necessary level rose on Friday when the U.S. Department of Commerce announced that the U.S. gross domestic product (GDP) grew at its fastest quarterly rate in two years. Between the second and third quarter, GDP growth rate more than doubled, to 2.9 percent for the three months ending in June from 1.4 percent for the three months ending in March.
Still, the most recent jobs report from the Bureau of Labor Statistics was rather mediocre, with little change to the unemployment rate and modest employment gains. While oil prices, a key influencer of general price levels, have zigzagged in recent weeks, and inflation rose from 0.8 percent in July to 1.5 percent in September, it hasn’t risen fast enough for a 2 percent inflation rate to be likely for October.