A closely-divided Federal Reserve could produce a policy statement at the end of its two-day meeting that includes something for both hawks and doves, a top central bank watcher said Friday.
It is not entirely implausible that the Fed interest-rate policy committee could include both hawkish and dovish sentiment, said Michael Hanson, chief U.S. macro strategist at TD Securities, in a note to clients. For the hawks, the statement could point to a December rate hike. And for the doves, the statement could play up concern about the low-inflation outlook.
“Our reading is that the voting members of the FOMC are quite closely divided between those who favor another rate hike this year and those who would just as soon be more patient,” he said.
The Federal Reserve will meet Tuesday and Wednesday. There is no press conference or new economic forecasts scheduled, so economists will be left to pore over the six-paragraph statement released at 2 p.m. Eastern Wednesday after the talks have concluded.
The Fed is universally seen as deciding to hold interest rates steady in a range of 1%-1.25%. Central bank officials have been quite open in their public remarks that the next date for any possible rate hike will be at the Dec. 12-13 meeting.
Investors think there is a greater than 80% chance that the central bank will hike rates in December. Expectations rose after Fed Chairwoman Janet Yellen made clear she thinks the Fed should keep raising rates even though inflation is low, and at the last meeting in September, 12 of the 16 Fed officials suggested they were on her side.
Read: Yellen says Fed should be ‘wary’ of raising rates ‘too gradually’
But some voting members on the Fed said they are concerned inflation remains stuck below the central bank’s 2% target. In particular, Chicago Fed President Charles Evans and Dallas Fed President Rob Kaplan have stressed the Fed should take a wait-and-see approach to a December rate hike.
Fed watchers are divided on whether the central bank’s statement will explicitly signal a rate hike in December.
Tom Simons, an economist at Jefferies, said he thought the Fed would point to a December move. The market needs “constant confirmation” of that idea, Simons said.
“If they don’t say anything, that would be viewed as a dovish statement,” he said.
Scott Anderson, chief economist at Bank of the West, also thinks there will be some sort of language explicitly pointing to a December rate hike.
“I am leaning toward seeing some sort of language change,” he said.
On the other hand, Chris Probyn, chief economist at State Street Global Advisors, believes the Fed will not say anything about December.
“They’ve got the market where they want it. Saying something explicit doesn’t buy them very much and they don’t want to tie their hands,” he said.
Probyn said he viewed a government shutdown in December as likely, adding that could force the Fed to the sidelines that month. The government is currently funded through Dec. 8, and without a new spending agreement, there would be a partial shutdown.
Many economists said the surprisingly strong 3% growth rate in the third quarter would seal the deal for a December rate hike.
“A rate rise by the Fed in December is a foregone conclusion,” said Diane Swonk, founder of DS Economics.
The U.S. central bank could signal a rate hike through an upbeat message about the strong economic data seen since the September meeting, Probyn said.
Goldman Sachs said the stronger data could cause the Fed to upgrade its assessment of growth risks to “balanced” from “roughly balanced.”
Read: Fed’s September policy statement
But some more dovish voting members of the Fed might not want any strong signal to be sent.
Earlier in October, Evans, who is nervous about low inflation, said “there’s room for a very honest discussion later this year as to whether or not it’s the right time to raise rates.”
They might want cautious wording on inflation as well.
Most economists said the debate about inflation would not derail a December rate hike but could slow the pace of rate hikes next year. The Fed has penciled in three rate hikes next year.
Probyn said the Fed “won’t have any compelling new evidence on inflation until you get into the spring of next year.”
That’s when some anomalies like the adoption of unlimited cell phone data plans will drop out of the year-on-year readings.
“If inflation is still down then you have to start taking the idea of a structural change to inflation more seriously. Then it becomes a debate,” Probyn said.
Many economists are leery about discussing the outlook for Fed policy in 2018 in great detail. There remain several wildcards. A Republican tax cut might spur the central bank to raise rates more rapidly. And it ultimately will come down to the new Fed leadership.
Yellen’s term as chair expires on February 1. President Donald Trump has been mulling whether to replace her or give her another term. At the moment, investors think that Fed Governor Jerome Powell is likely to be tapped to lead the central bank.
See: Trump leaning toward appointing Powell to top Fed spot: report
But other officials stress no decision has been made. Stanford University economist John Taylor is also in the running. White House officials say Trump will announce his selection by Nov. 3.