Fed should ‘dare’ to make the next step in December - Commerzbank

Dr Christoph Balz, analyst at Commerzbank noted that latest statements from Fed officials once again confirm the FOMC’s split view about when to hike interest rates. According to him, Fed is likely to remain sidelined at its meeting in early November, shortly before the presidential election, but should ‘dare’ to make the next step in December.

Key Quotes

The latest statements from Fed officials once again confirm the FOMC’s split view about when to hike interest rates. At its last meeting in September, a total of three members voted for a rate hike and thus went against the majority.

One of the ‘rebels’ was Loretta Mester (Cleveland Fed) who, in an interview, said the need for higher interest rates resulted from the fact that the Fed had to act in a “forwardlooking” and “preemptive” manner. She believes waiting for inflation to reach the 2% target would entail the risk of quicker rate hikes.

Bill Dudley (New York Fed) took the opposite position, focusing on the fact that – in case of a recession in the next few years – the Fed would be left with little scope to ease monetary policy. Therefore, it should raise rates only cautiously.

Among the remaining ‘doves’ Charles Evans (Chicago Fed) said he would agree to hike rates this year provided data remained firm. However, he is not a voting member this year.

Overall, we feel confirmed in our forecast that the Fed is likely to remain sidelined at its meeting in early November, shortly before the presidential election, but should ‘dare’ to make the next step in December.