Even with weak data, Fed rhetoric increasingly points toward a December lift-off

Even with weak data, Fed rhetoric increasingly points toward a December lift-off. In her testimony before Congress yesterday, Chairwoman Yellen said the economy is 'performing well' and a December hike is a 'live possibility'. NY Fed President Dudley 'completely' agreed in a New York interview later in the day. Markets have had to adjust expectations rapidly. Only a week ago, poor data had led Fed fund futures markets to lower the odds of a December hike to less than 30%. The FOMC statement blasted those odds up to 50% with its explicit reference to a December move. Yellen's testimony yesterday pushed them further north to 58%. 

Have the data suddenly improved? Not at all, save for yesterday's very decent service sector ISM that couldn't have factored into official comments. GDP growth dropped to 1.5% (QoQ, saar) in the third quarter. Manufacturing sector growth has dropped to zero over the past year. Exports have fallen by 10% over the past 10 months. And nonfarm payrolls have deeply disappointed the past two months. One must assume that the Fed's bar on what constitutes 'solid' data has slipped, because the data sure have. 

"To be sure, we doubt GDP growth will drop much below 1.5% for very long. Nor do we expect nonfarm payrolls will drop much below the 130k/140k range that we expect in the coming months (save for normal volatility), or that core inflation will drop much more than it already has (1.25% YoY for core PCE). In short, we don't think the economy is on the verge of a sharp downturn. Plainly, the Fed doesn't think so either, or it wouldn't be doing its darndest to keep December on the table", says DBS Group Research.

But the Fed's view are just that: views, forecasts. Nobody's very good at it and the Fed is especially poor at it. And the reality is the data are going the other way; the wrong way. There's probably a rule somewhere that says 'don't hike when the data are going against you'. If there isn't, there should be. It's unnecessary bravado. Kind of risky too.