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Fed Indicates December Rate Hike Almost Certain; Market Volatility Rises on Election Uncertainty

Note to our readers: This column is not an endorsement of any candidate but is meant to discuss the possible capital market reactions to the post-election outcome.

As Expected, today’s Fed meeting did not produce a rate hike (although 2 members voted to raise). This was expected as the meeting comes days before a national election and there was no press conference scheduled. However, the Fed used “Fed speak” to say “we’re hiking rates next month – count on it”. The 3rd quarter GDP growth of 2.9% annualized and the seemingly stabilized 5% unemployment rate has given the Fed confidence that their policies have had their intended effect. The final piece of the puzzle is inflation, which is finally picking up. The Fed’s favorite gauge, Personal Consumption Expenditures, showed an annualized core rate of 1.7% last month. Another closely watched index, expected price increases, hit its highest level in more than a year. The December meeting is the Fed’s last chance to raise rates in 2016 (remember they predicted about 4 rate increases for 2016 at the end of 2015!). Futures markets are pricing in a 75% chance of a December increase. Election: Markets like certainty, continuity and a divided government (ie President and Congress from two different parties). Until last week’s bombshell FBI announcement, it looked like a likely Democratic President and Republican Congress with the Senate a toss-up. A potential Trump victory has markets nervous as it may be a Brexit like moment. It may cause Fed Chair Yellen to resign as that result may be seen as a negative referendum on Fed policy. Markets also could react negatively to a close, highly contested result like 2000 that drags into December. Treasuries (along with Munis and other ultra safe investments) may rally with yields dropping on a flight to quality. Credit spreads could widen as stocks and riskier instruments drop in price. This may cause the Fed to postpone the expected December rate increase. Look for markets to remain on edge until this uncertainty has been resolved somehow. Stay tuned.   David R. Pascale, Jr.