[sprmario]

Next rate increase: November or December or both?

There has been no specific communication from the Federal Open Market Committee to say that they will definitively raise interest rates again at the Nov. 10 meeting. But perhaps more importantly, nothing to say that they won't.

A popular gauge of upcoming Fed interest rate moves are the fed funds futures contracts that are traded on the Chicago Board of Trade. Futures contracts are used by investors to hedge, or speculate, on the movement of various commodities, interest rates or financial market indexes. Based upon the trading of fed funds futures with varied expiration dates, one can peg the market expectations of upcoming interest rate moves.

Based upon trading of the November contract, the expectations for a rate move are 60 percent. For the December contract, the odds reflect a certain quarter-point interest rate move by the December meeting, though not necessarily at the December meeting. The odds, as they currently sit, indicate one interest rate move by year-end, but not two. So will it be November or December?

As it pertains to the November meeting, the odds are certainly subject to change, especially after one of the two monthly employment reports to be issued between now and the Nov. 10 meeting. But the odds of 60 percent, coupled with the Fed's post-meeting statement on Sept. 21 that did little to hint at any greater possibility of not raising rates at the next meeting (i.e. the same "measured" phrase remains), and continued references that the fed funds rate is still well below the neutral level aren't exactly consistent with an intent to hold steady in November. This is not to say that plans won't or can't change, but the FOMC members would have some serious jawboning to do first.

If you're skeptical about the orchestrated jawboning efforts of Fed governors, consider a speech made last night by Susan Schmidt Bies, a voting member of the FOMC. She repeated some of the same phrases used by Alan Greenspan regarding the economy, noting that economic growth has "regained some traction," that "inflation and inflation expectations have eased," that inflation had been boosted by "transitory factors," and that the "Federal Reserve can remove its policy accommodation at a measured pace." My friends, this is no coincidental choice of words, but a key component of the Fed's ongoing communication efforts geared at adequately preparing financial markets for intended interest rate moves.