Fed watchers had a busy time last week with the release of both the minutes from the September FOMC meeting and one of the most popularly followed data points, CPI.
The first data point was the release of the minutes from the September FOMC meeting. There were few surprises. The consensus of the Committee members appears to remain that the risk is not raising rates too fast but failing to raise them fast enough. There has been a lot of chatter about when the Fed might pivot, or on the other side, will they increase by more than 75bps. In my view Chair Jay Powell has been very transparent about policy and has taken the course of telegraphing policy and avoiding market surprises. Every signal has pointed to a 75bps increase and I don’t see any move higher or lower.
While the next meeting is likely to see the 75bps increase, the minutes did acknowledge that several FOMC members recognized that at some point there would likely be a pause to review the Fed’s effort. The minutes noted that it “would become appropriate at some point to slow the pace of policy rate increases.”
On Friday the government released the much-anticipated CPI for September and it came in higher than many had expected. As the CPI number is relatively easy to understand and touches everyone, national news organizations tend to focus on it above nearly all other data points. Hence, the CPI is perhaps the most widely quoted data point by politicians and the media.
The next FOMC meeting is November 1 and 2, with the Chair’s press conference at the conclusion of the session on the afternoon of November 2. What makes this session a little more challenging than others for the Board, and the Chair in particular, is addressing the problems of inflation and the economy just days before America goes to the polls to elect the House and Senate. Fed Chair’s focus will be on trying to make the central bank above politics, but a rate hike and press conference on November 2 is unquestionably going to put Fed policy front and center in a news cycle less than a week before the election.
Politics and the Fed
The high CPI number and the Fed’s hike in November is likely bad news for Democrats. During the summer the President saw his numbers rise, and Democrats were feeling better about the election as gas prices dropped and the Democratic majority in Congress passed bills on technology expansion and infrastructure. Now with the Election fast approaching the economic news turns negative.
Democrats had hoped that the Supreme Court decision repealing Roe vs Wade would be a game changer and help them beat the odds of the party in the White House taking significant losses in midterm elections. There have been signs of registration gains for women and younger voters, but in the closing days economic news is dominating the headlines and this can’t be good for Democrats.
The economic headlines reinforce the general consensus that, in the battle for control of the House, Republicans continue to have an advantage. Between the historical trend of voters punishing the party in the White House, and several districts that have tilted Republican after redistricting, estimates range from a 10 seat to a 30 seat Republican gain. The current Democratic majority is just 5 seats.
In the Senate there remain four or five races that will likely determine control and the battle remains too close to call. As in the House races, economic news could be pivotal in some of the closest races.
Polling shows the Democratic Senate seat in Nevada held by Senator Catherine Cortez Masto as the most endangered incumbent on the ballot. The race looks to be very close and polls show the Senator tied with Republican Adam Laxalt. The other Democratic seat that started the cycle in real trouble was Georgia, but with the challenges Republican Herschel Walker has had, Democrats are feeling better about holding the seat. While Senator Warnock is leading in most polls, Walker did better than expected when the two met in debate, and his poll numbers have been slowly improving.
If either Laxalt wins in Nevada or Walker surprises in Georgia, Democrats will need to pick up at least one more seat in order to hold their majority in a 50/50 Senate. The three Republican held seats that are all very close are Ohio, Pennsylvania and North Carolina. In all three states the incumbent Republican Senators are not seeking re-election.
The focus has been on the Pennsylvania and Ohio seats where Trump backed candidates Dr. Oz and writer/investor JD Vance won contested primaries. Over the weekend, the two biggest papers, Cleveland Plain Dealer and Philadelphia Inquirer endorsed Democrats Rep. Tim Ryan in Ohio and Lt. Governor John Fetterman in Pennsylvania. However, from my days in politics I learned that big newspaper endorsements help the morale of the candidate and their supporters, but they seldom are a deciding factor.
Midterms are usually seen as a referendum on the President, and while President Biden’s favorable ratings have been slowly rising, it is hard to see that continuing in the final month of the campaign with inflation concerns front and center. The President continues to enjoy good employment numbers, but the story is likely to be focused on inflation and a central bank rate hike a week before Election Day.