Market pricing puts odds of December Fed rate hike near 85%
Key Facts
Markets are pricing in odds of nearly 85% that the U.S. Federal Reserve will raise interest rates at its December 8 and 9 meeting, according to an Associated Press report citing futures pricing. That puts the prospect of an increase at the top of investors’ watch list as the meeting approaches, though it remains a market estimate, not an announced decision by the central bank. In Europe, three European Central Bank officials expect the Governing Council to raise its rate to 2.75% at its scheduled December 17 meeting, Reuters reported. The Bank of Japan, meanwhile, kept its short-term interest rate at around 1.25% in its October 30 decision. Together, these developments reflect bets on tighter policy in the United States and Europe alongside a Japanese decision to hold rates, amid energy-related inflation risks.
In the United States, the Federal Reserve raised its target range by a quarter of a percentage point on September 16, to 3.75%-4.00%, with the decision unanimous, according to the Fed statement. The focus on December follows September inflation data showing the consumer price index rose 3.7% year over year, while the index excluding food and energy rose 2.6%. The Bureau of Labor Statistics is scheduled to release October data on November 10, weeks before the Fed meeting. The Fed has set December 8 and 9 for its next meeting, with a news conference scheduled for December 9. These dates provide a timeline for tracking whether price data alter market bets before the decision.
In the euro zone, the European Central Bank left all three key interest rates unchanged on October 29 and said its decisions would remain data-dependent and be made meeting by meeting, without a prior commitment to a specific path. ECB President Christine Lagarde said the Governing Council discussed whether a rate increase was appropriate, but unanimously decided to hold rates at that meeting. September data showed annual inflation rising to 3.8% from 3.2% in August, while energy inflation jumped to 18.9% from 14.3%. The bank said higher energy prices increase inflation risks while also weighing on growth prospects, putting policymakers between containing prices and taking economic activity into account. According to sources cited by Reuters, three officials see a December increase to 2.75% as almost certain, followed by a pause; the bank said the decision would remain data-dependent.
In remarks after the October meeting, Lagarde said the bank would monitor data over the coming weeks and would likely prepare new scenarios in December before making its next decision. The ECB has set December 17 for its next Governing Council meeting. Euro zone flash inflation for October is due on November 4, while annual inflation stood at 3.8% in September. In Japan, board member Takata dissented, arguing that underlying inflation had reached the price stability target and that policy should move toward the neutral interest rate at a faster pace. The decision to hold the rate at around 1.25% passed by 8 votes to 1 at the October 30 meeting.
The Bank of Japan’s near-term agenda includes the release of a summary of opinions from its September meeting on November 5, followed by the minutes of its October meeting on December 23. The summary of opinions will provide insight into board members’ positions after the September decision, while the October minutes will later document the discussion behind the decision to hold rates. In the United States, the October inflation data due on November 10 will come ahead of the Fed’s December meeting. ECB officials will revisit the decision at their December 17 meeting, after a period that a Reuters report said may follow an expected increase. Price data and energy developments remain among the issues markets will monitor ahead of those meetings.