Fed Day Wednesday and Elections one week to go
- Wednesday is FOMC decision day and Chair Powell’s press conference.
- FOMC 75bps increase expected; will Powell give clues about future policy?
- Republicans appear headed to House takeover, Senate remains too close to call.
- PA’s complicated Senate race may determine control of the Senate.
After a month of discussion about the next move by the Fed’s Federal Open Markets Committee (FOMC), decision day comes this week. The FOMC starts to meet on Tuesday and around 2:00 PM on Wednesday the Fed will announce the rate move. A 75pbs increase is widely anticipated.
In my view, as Fed Chair Jay Powell has done a good job of telegraphing policy and avoided surprising markets, I don’t expect anything different at this meeting. Markets are clearly anticipating a 75bps move and any other outcome would surely shock markets. Central bankers from around the world are in regular contact with each other; hence I don’t believe the European Central Bank acted in a vacuum when they increased EU rates by 75bps last week. Any other outcome by the US would likely cause global concern about the lack of coordination among central bankers, an outcome Powell and the Fed surely want to avoid.
While there may be little suspense about the rate move to be announced on Wednesday, there is always a great deal of interest in the Chair’s post-decision press conference. This week’s presser by Chair Powell is happening just six days before the US goes to vote in the midterms. This will put a great deal of pressure on the Chair to walk a fine line between being too pessimistic about inflation and the economy hence potentially hurting Democrats, and too much of a Pollyanna by saying the fight against inflation is making progress and helping President Biden and Democrats.
In my view the Chair will continue his central arguments that 1) the Committee will be data driven. 2) They will not act prematurely in lowering rates in policy decisions designed to reduce inflation, and 3) Reflecting the minutes of the last FOMC meeting he is likely to add it: “would become appropriate at some point to slow the pace of policy rate increases.”
Elections
With Election Day now just a week away there appears to be no major change in the basic storyline that Republicans will gain control of the House, and the Senate remains too close to call.
Democrats are facing tough odds in both looking at history and at growing concerns many Americans have with inflation and the economy. During the past summer it appeared that the Supreme Court decision to overturn Roe vs Wade had given a new level of momentum for Democratic candidates, but as summer turned to fall most polls showed a return of voter anxiety over the economy.
The historical pattern is clear: in all but four off-year elections since the Civil War the Party that controls the White House has lost seats in the House. Since World War II the average loss has been 26 seats. With the Democrats holding only a five-seat majority, history points to a Republican win in the House.
The Senate remains too close to call but polling appears to show growing Republican support in seats currently held by Democrats in Georgia, New Hampshire and Arizona. All three states have seen the Democratic incumbents holding solid leads a month ago but the Republican challengers have gained in the past few weeks.
There has been a great deal of attention focused on Pennsylvania, where Democrats thought they had their best shot at picking up a seat where Republican Senator Pat Toomey is retiring.
As I have written, my experience is that debates seldom are make or break moments in a campaign, but there are exceptions, and last week’s Pennsylvania Senate debate has clearly had an impact.
In the debate between Lt. Governor Fetterman and Republican Dr. Oz, Oz had a gaffe when he said a decision on abortion should be between “a woman, doctors, local politicians…” Local politicians are not a group that embodies wide respect, and under normal circumstances this statement could have been a gamechanger; and indeed, Democrats are using the quote in commercials. But the impact of the abortion statement by Oz was in contrast to the difficulties Democrat Fetterman had answering questions, demonstrating the auditory processing issues he continues to have stemming from his stroke in May.
The impact of a speaking disability is likely hard to pick up in a polling question, but it may well hurt his candidacy in the closing days of the campaign.
The other seat that is being closely watched is in Nevada, where Senator Catherine Cortez Masto continues to battle for re-election. Recent polls have shown the race to be a statistical tie. If Republicans pick up one of these close races Democrats will need a win in a Republican held seat to maintain their 50/50 control.
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