Last week, stocks were startled by the one-two punch from the comments by Fed Chair Yellen and the strength of the October employment report. Now, the possibility of a December rate hike is back on the table, causing high-yielding sectors to slip, and dollar-correlated assets to slump, while also encouraging the media to fanatically refocus on Fed comments and likely actions.
Regarding likely actions, market prognosticators have been heard to proclaim in public or in the financial media that the Fed typically doesn’t raise rates in December and won’t play politics by hiking rates ahead of a presidential election. Well, history begs to differ.
Looking at discount rate increases from 1945-1989 and Fed funds thereafter, not only has the FOMC raised short-term rates five times in December (1965, 1968, 1980, 2004, and 2005), but they also hiked rates six times Q3 of presidential election years (1948, 1956, 1980, 1988, and twice in 2004).
As a result of the Fed’s prior history of raising rates in December and ahead of presidential elections, Standard & Poor’s Economics does not expect the Fed to do anything out of the ordinary by initiating a rate-tightening program in December. What’s more, they expect the benchmark federal funds rate to rise to between 1.25% and 1.50% by the end of next year.
So there you have it. History shows that the Fed has raised rates not only in the final month of the year, but also ahead of presidential elections. Therefore, Standard & Poor’s Economics, which operates independently of S&P Capital IQ, is not expecting the Fed to set precedent when they forecast December to be the long-awaited start to the rate-tightening cycle, and project the possibility of a rate hike to occur during the months leading up to the 2016 presidential election. As a result, investors should prepare themselves to witness fireworks displays long after the debates have come to a close.