ICAP: "The Window Of Opportunity For A Fed Rate Hike Has Closed"

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With September rate hike odds coiling bloe 10%, the market has already spoken about the possibility of a rate hike in 2 days. And since the Fed has never "surprised" the market by hiking when expectations of a rate increase were below 60% as we documented last year, it is unlikely that Yellen will seek to shock the market into an aggressive selloff.

And sure enough, in a note by Wrightson ICAP economist Lou Crandall, he writes that "the window of opportunity for a Fed rate hike has closed before the FOMC has a chance to meet, again.”

He adds that “no doubt” that Yellen will say at her press conference that Fed expects to tighten over time; yet hard for Fed to be “overly hawkish” since September statement will need to explain why policy makers aren’t hiking this week. FOMC may decide statement should remain neutral, leave it to Yellen to deliver “close but not quite there yet” message.

Crandall believes that while a "comfortable" majority on FOMC probably sees justification in at least a quarter point move at this point, ambiguity in near-term direction of economic data makes this a “ticklish” time to announce a hike.

Making matters worse for the Fed, the central bank would take a “reputational hit” if economic data remain ambiguous next month.

Looking at the dot plot, the ICAP economist believes that the "dots" will likely continue to show almost all FOMC members favoring at least one hike in 2016, along with slightly shallower tightening trajectory in 2017 and additional downward drift in estimates of long-run neutral rate. He concludes that the FOMC’s forecasting record has become a “sore point for many”; tightening in middle of what turned out to be a “soft” spell of data “would not be helpful to the institution”

Finally, looking at the near future, he says that a November hike “is not very plausible”; in absence of “extreme data outcome,” Fed should “keep its head down” in the week before a presidential election.

The question then is whether December is still live. The answer most likely depends on who the next US president is.

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