Fed hike set for December barring major market shock

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It would take a “significant financial market shock” for the US Federal Reserve to hold rather than raise rates at its December meeting, as the central bank takes no action at its November meeting – one week before the presidential election.

Markets are currently pricing in a 78 per cent chance of a rate rise at the FOMC’s next meeting.

Despite the Fed leaving rates alone, the S&P 500 appeared more preoccupied with Republican nominee Donald Trump taking out the presidency and continued its seventh-session losing streak – its longest in five years.

Tim Graf, head of macro strategy for Europe at State Street Global Markets, says the Fed “looks to be waiting for the US election to pass before turning their well-telegraphed intentions to hike rates into action”.

“With labour market data sufficiently strong and inflation trending back towards target levels, it would take a significant financial market shock to stay their hand at the 14 December meeting.”

AJ Bell investment director Russ Mould says the Fed did not provide “concrete guidance” on its thinking for December, unlike the lead up to its last rate hike when it admitted normalisation would be likely to occur at its next meeting.

“It has admitted that the case for a rate rise has ‘continued to strengthen’ but clearly wants to see the fallout from the election before it provides any firmer guidance or finally makes a decision almost a year on from its last decisive move.”

US election polls examining the popular vote have narrowed since the FBI announced that it would be examining emails connected to an aide connected to Democratic nominee Hillary Clinton.

Interactive Investor head of equity strategy Lee Wild says a Reuters/Ipsos poll that put Clinton 6 points ahead has been ignored by markets amid the “frightening” possibility that Trump could become the most powerful person on the planet.

“The market clearly isn’t buying it as terrified investors chased gold above $1,300 an ounce for the first time in a month. Expect a further boom in safe haven assets if Trump wins.”

Across the Atlantic, Wild says there is “no chance” Bank of England governor Mark Carney will tinker with rates at the UK central bank’s meeting today, pointing to the fact he will want to keep dry powder for the triggering of Article 50.

“Much more interesting is the Bank’s quarterly inflation report this morning,” Wild says.

That could put real pressure on consumers and trigger that widely-anticipated recession in 2017.”