Does Lack of Fed Clarity on Rate Hike Timing Speak for Itself?

For months Federal Reserve policy makers have assured investors, analysts and economists that when the time comes to raise interest rates for the first time in nearly a decade the announcement won’t come as a surprise.

But one week before the Fed is scheduled to make a decision on a rate hike there is no clear consensus on what direction central bankers are leaning. Meanwhile, influential Fed figures like Chair Janet Yellen, Vice Chair Stanley Fischer and New York Fed President William Dudley have given no indication of which way they’re leaning.

Consequently, despite their earlier claims, whatever decision the members of the policy-setting Federal Open Market Committee announce next week will come as a surprise.

To some Fed watchers the Fed’s refusal to provide markets with some clear sign as to what’s going to happen next week speaks for itself.

“They haven’t tipped their hand to this point, which means perhaps they have tipped their hand,” said Carl Tannenbaum, chief economist for Northern Trust in Chicago.

Tannenbaum theorized that the Fed’s glaring silence on all the uncertainty surrounding their looming decision is a pretty good sign that policy makers will delayed a rate hike past the September meeting.

To raise rates at the September meeting amid all the uncertainty would be to break their earlier promise not to surprise markets, said Tannenbaum. “They don’t want to catch anyone by surprise,” he said.

Sifting Through the Data

With all FOMC members in a mandated, seven-day communications blackout leading up to the announcement next Wednesday, it’s fairly certain the Fed won’t be tipping its hand between now and then.

The Fed has said repeatedly throughout 2015 that its decision to raise rates will be “data dependent,” meaning the decision will hinge on the trajectory of such bellwether economic indicators as GDP, monthly jobs reports, housing sales and starts and consumer sentiment.

All of these data bellwethers were showing signs of gaining sustained momentum in the first half of the year and many Fed members were sending strong indications that they were anxious to start raising rates and returning U.S. monetary policy to “normal.” A September rate hike seemed a pretty sure bet.

Then Chinese stock markets began to meltdown last month and concerns began to grow that China’s economy, the second largest in the world, was starting to show increasing signs of weakness.

Suddenly a September rate hike wasn’t so certain anymore. And that’s where it stands today.

Tannenbaum said central bankers now have to sift through all of the recent data and run it through the newly-formed prism of “international intrigue” created by the turmoil in Chinese markets.

“It’s not going to be easy to do,” he said. “I suspect many sitting around the table will determine that waiting is not such a costly move and that there is more risk to moving prematurely than waiting a couple of months.”

Framing the Narrative

Tannenbaum’s theory is as plausible as any other being circulated at the moment. But the truth is that no one – perhaps not even the Fed policy members who will be voting next week – knows what’s going to happen.

Another strain of thought, equally as plausible as Tannenbaum’s, holds that the Fed has been prepping markets for a September rate hike and the higher borrowing costs that will follow for months and isn’t likely to swerve from that strategy because of a few weeks of market volatility.

After ticking off a laundry list of economic data points that have shown improvement in recent months – real GDP growth, consumer spending, home building, the unemployment rate – David Kelly, chief global strategist for JPMorgan Funds, said he believes the Fed will raise rates next week, kicking off gradual upward trajectory of borrowing costs.

“In this environment, and assuming no significant shocks to the economy or global financial markets, we still narrowly expect the Fed to begin raising rates short-term interest rates this month, skip a meeting in October and raise rates again in December,” Kelly said.

The one point everyone agrees on is that once rates do start moving higher they will do so gradually. Few, if any, Fed policy makers have spoken publicly about the timing and trajectory of rate hikes without noting that ‘how’ rates move higher is significantly more important than ‘when’ rates move higher.

That effort to frame the narrative has done very little, however, to quell the anxious speculation that has dominated the investment landscape since quantitative easing ended last October and Fed members began referring to an imminent rate hike.

For what it’s worth, Federal funds futures are forecasting a 24% likelihood of a September rate hike, down from a 48% likelihood a month ago ahead of the Chinese market turbulence.