Fed Gives Subtle Nod on December Hike As Election Roils Markets

(Bloomberg) -- When everybody is throwing rocks, sometimes it's best to duck.

Six days before a contentious U.S. presidential election, Federal Reserve officials opted to avoid the fray and instead telegraphed their intent to raise interest rates in a single word.

The Federal Open Market Committee, led by Chair Janet Yellen, said in its statement Wednesday that it only needed “some” further evidence that inflation and employment were on track toward their goals to hike, after leaving rates unchanged for the seventh consecutive meeting. Two members dissented.

The U.S. economy continues to expand, and both inflation and employment are close to the central bank's goals. What Fed officials don't know is what will happen to financial markets after Election Day on Nov. 8.

“What is happening with the election probably is causing some concern, even though they are not supposed to be political,” said Jennifer Lee, senior economist at BMO Nesbitt Burns Inc. in Toronto. “Given that the market is focusing on it, the Fed is going to be very aware of it as well."

Stocks fell to their lowest point since July Tuesday after a poll showed Republican candidate Donald Trump ahead of Democrat Hillary Clinton in the presidential race. Declines extended Wednesday with the S&P 500 Index ending the day down 0.7 percent, dropping for a seventh straight day.

The Fed's use of the word “some” versus the harder-hitting “next meeting” phrasing of October 2015 to signal an approaching move was appropriate for several reasons, said Vincent Reinhart, chief economist at Standish Mellon Asset Management Co LLC in Boston, who in his former role as a Fed economist has helped draft statement language.

Investors prior to the meeting had already priced in about a 70 percent probability of Fed action next month, so there was no need to hammer home the point. The chances of a move shifted up to 80 percent following release of the FOMC statement.

Markets ‘Get It'

“If markets get it, they don't do anything to perturb them,” Reinhart said. Also, “they don't want to be on page A-1 of the newspaper six days in advance of the election.”

Also, the “some” phrasing is non-committal, so if election results create market turmoil, Fed officials could defer their plans to raise rates next month.

Still, there was nothing in the statement to indicate their expectations to raise rates this year -- communicated via quarterly projections released at the September meeting -- has wavered. In September, 10 of 17 officials forecast one rate increase by the year-end.

The November statement suggests “the data threshold for the Fed is lower,” said Priya Misra, head of global interest rate strategy at TD Securities USA in New York. “All they need are two payroll reports to come in with gains of at least 100,000.”

The Labor Department will report Friday that the economy added 175,000 jobs last month, according to economists surveyed by Bloomberg.

The Fed's statement also showed confidence that inflation is on track to reach their 2 percent target. The central bank said the pace of price increases “has increased somewhat since earlier this year” and that market-based measures of inflation compensation “have moved up.” The committee also omitted previous language saying inflation would probably “remain low in the near term.”

“There does appear to have been a more explicit reference to the possibility that inflation may be getting a little bit of steam now,” said former Richmond Fed President Alfred Broaddus in a Bloomberg Television interview. “That might tend to reinforce the view that we are going to have a rate increase in December, but not a lot beyond that.”

--With assistance from Matthew Boesler Randall Woods Christopher Condon Jeanna Smialek and Sarah Ponczek To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net. To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Alister Bull