Fed is widely expected to leave key interest rate unchanged

That’s because the USA economy is improving enough to allow interest rates to rise soon to more normal levels.

While investors had all but discounted a move on interest rates this week, they overwhelmingly see the Fed raising borrowing costs next month. Inflation is expected to pick up gradually over the next two years’.

However, the economic and political calendars contain much which could derail a December rate hike, such as raucous U.S. elections and their uncertain aftermath, two more monthly jobs reports, and struggling crude markets, as well as political developments in Europe. However, Fed watchers – from Wall Street to academia – believe the Fed doesn’t want to even create the appearance of trying to influence the election.

Regardless of when the Fed moves, dollar bulls face the prospect of the slowest and shallowest tightening cycle in recent history, based on the market for overnight index swaps, which reflect expectations for the fed funds effective rate.

The growing prospect of more expensive loans apparently didn’t sit well with many investors, who sold off stocks after the Fed Open Market Committee’s statement came out. Some analysts had thought this phrase might have been revised to send a stronger signal of a possible December rate increase.

On risks in the housing market, it maintained the view that “supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments”. Either the Fed has botched its communications badly, or the collective wisdom of the markets has read the Fed correctly, and there will be no hike in November.

Plus, investors are already on edge over the US election. It makes more sense to hike after the dust has settled.

A hike in the United States interest rates can potentially lead foreign portfolio investors and funds away from emerging markets such as India. “With the election looming and uncertainty already gripping markets, the Fed needed to hold off in case there is a Brexit-like aftermath”.

Fed leaders convene eight times a year, and Yellen holds a press conference at four of them – March, June, September and December. Right before the Fed’s announcement Wednesday afternoon, investors believed there was almost a 70% chance of an increase at the end of the Fed’s meeting on December 14.

By its mid-December meeting, the Fed will have in hand the election results, as well as two more months’ worth of data on jobs, covering October and November.

But December is also somewhat of a deadline. Last, the three dissenting voting members (Mester, George, and Rosengren) from the September meeting will again likely vote against the action if the Committee decides to leave rates unchanged.

“The thing that jumps out is how little was changed”, said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in NY, explaining that officials probably feel that markets have sufficiently priced-in a possible December rate increase, allowing them to avoid the sort of explicit signal that they gave in the statement immediately before their hike a year ago.