US: Expectations for Fed policy have barely changed - BBH

Research Team at BBH, suggests that after a very strong service sector ISM and better than expected factory/durable goods orders, and a meh of an ADP report, expectations for Fed policy have barely changed.  

Key Quotes

“Bloomberg says the odds of Nov hike increased to 23.6% from 21.4%.  The CME's calculation puts the odds at 16.6%, up from 14.5%. The odds of a December move have been pared to 50.2% (from 50.3%) for Bloomberg, while the CME puts it at 54.8% (from 55.1%).  

Where we stand?  We think there is a de minimis chance of a November hike.  There is no precedent for a hike a week before a national election.  This is one way how the Fed traditionally demonstrated its political neutrality.  It would not change policy so close to an election.  It does not mean that the Fed cannot do so, but it suggests that it would need a compelling reason to break from tradition.  

Moreover, remember the corner the Fed has painted for itself.  It will not change policy without a press conference.  There is no press conference after the Nov meeting.  A rate hike then does not only require a break from tradition, but it also requires a logistical challenge of having a last minute press conference without word leaking.  

On the other hand, we think there is a strong chance of a hike in December and with the current odds, there is scope for investors to discount a greater likelihood.  A strong jobs report is helpful, but before the December meeting, Fed officials will have two more reports.  This week's then may not be the trigger for a dramatic shift in expectations, barring a blowout report.”