The “Data Dependent” Fed Continues to Consider the Data

This afternoon the minutes from the most recent Federal Reserve Open Market Committee (FOMC) meeting were released. Yesterday the market digested the October CPI (inflation) data.

Next week, GDP (Tuesday) and Durable Goods (Wednesday) will be relatively important. Without question, the upcoming Unemployment Report (Non-Farm Payrolls) on 12/4 will be the most influential piece of economic data before the December Fed Meeting where most market participants anticipate the Fed will raise interest rates for the first time since June 29, 2006.

Looking back – the CPI data was in line with expectations (+0.2%) as was the Core Inflation number, which excludes Food and Energy (+1.9% YoY). The Fed has targeted a “healthy” annual inflation rate of 2.0%, so we are slightly below their benchmark.

Price pressure (upward) in things like housing, medical care, alcohol/recreation have been almost entirely offset by the steep drop in energy prices over the past year. In November and December of 2014, WTI Crude Oil was selling around $75/barrel. As of 11/18/2015, WTI is selling around $42/barrel.

Today’s FOMC Minutes indicated that Yellen and the other Fed Governors believe “liftoff may be appropriate”. On first blush, the minutes strike a slightly more dovish tone than the press conference following the last meeting.

U.S. and Global equity markets have responded positively this week with the .SPX about 2.8% off Friday’s close (when headlines about terror in France emerged). The .RUT is higher by nearly 2.0% compared to last week’s settle. The VIX has fallen from just over 20 to nearly 17 in the past 3 sessions.

The old adage that “The Market is Always Right” seems apropos.

Interpreting Fed Funds Futures, the market’s assessment continues to point toward a 25 basis point increase next month. The likelihood has vacillated between 62 and 71% this week. Current reading is just below 68%. Keep in mind that figure is up from about 6% a month ago. Barring exogenous shocks, the Fed, and the broad market will remain “data dependent”.


Post written by Kevin Davitt, CBOE Options Institute