The US Presidential election is on November 8th. There are two more FOMC meetings this year, November 2nd and December 14th. Raising in December, after the election but before the inauguration is probably dumb. Raising interest rates before the election is certainly dumber. Last week’s Fed meeting confirmed our beliefs that there would be no change to the benchmark interest rate. What you might have missed was that three Fed officials dissented; that is to say they did not agree with the committee’s decision. All three members, Kansas City President Esther George, Cleveland President Loretta Mester and Boston President Eric Rosengren voted to raise interest rates 25bps. The Rosengren dissent was the surprise. He has dissented before but it was going the other direction on rates. He pointed out a potential bubble in commercial real estate well before the world saw the meltdown unfold. The three dissents are also the first time in 2 years that more than two Fed officials have dissented. Has the mood of the Fed shifted and is Rosengren right again?
Since the September Fed meeting last week the odds of a November hike have dropped to 17% and December sits at 49%. In fact rates have dropped every day since the Fed meeting. So much for the three dissents.... Does the market know something the Fed doesn’t?
The market generally favors a Clinton presidency under the premise that less change is less disruption. It is generally believed that her presidency would mean a continuation of the last 8 years under President Obama. Putting personal opinions aside on each of the candidates, it is important to understand the impact to the market that each candidate will have. What Trump will do as President is still largely unknown and that perception could cause some disruption to the markets. He certainly fuels that speculation by specifically targeting Janet Yellen and the Fed’s current interest rate policies.
On a lighter note, the 10yr is down to 1.56 today after closing above 1.70 last week and it appears we are retracing back into the 1.50-1.60 range after the pre-FOMC meeting blip. Look for continued dialogue and arguments over the December FOMC meeting. It is a wild card and if Clinton is elected I wouldn’t be surprised if the Fed moves right after. They openly and repeatedly state they aren’t political but I believe that if they feel confident in the continuation of the last several years they will forge forward. We should not forget that they want to raise interest rates, they just need enough reason.
For a little color, check out the graph below. The orange line is the 10yr Treasury which shows that generally long term rates have come down this year. The blue line shows the 2yr Treasury which indicates that shorter term rates are relatively flat. If the Fed is raising rates very soon as they have indicated, I would expect that shorter term rates would have moved up. Long term rates coming down also suggests that such moves, if they happen, will be very limited. At least according to the market.