Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Calendar won't disrupt the Fed...Here's what could

Five key numbers from October jobs report

If the Federal Reserve opts not to raise interest rates in December, it won't be over calendar or political concerns.

With arguments against an increase in the key funds rate dissipating, two of the remaining concerns are that Fed officials would be reticent to hike in December, when a move could have outsized effects due to low volume and liquidity, and that 2016 could present problems because it's a presidential election year. The latter argument goes that a body that is supposed to be independent but has been stacked with doves during the Obama administration would not want to do anything to upset the economy and jeopardize the election for Democrats.

History suggests neither actually has played much of a role in thinking among Federal Open Market Committee members.

In fact, the FOMC raised rates five times in Decembers (1965, 1968, 1980, 2004 and 2005) and numerous times during presidential years, including in the third quarter — the one immediately preceding the Election Day — six times, according to research from Sam Stovall, U.S. equity strategist at S&P Capital IQ. The election year hikes came in 1948, 1956, 1980, 1988 and two in 2004.

"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," Stovall said in a note to clients Monday. "Well, history begs to differ."

Fed Chair Janet Yellen
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Just a few weeks ago, Fed watchers were giving little chance to the possibility of a rate hike. Markets were too volatile, weighed down by global growth concerns, the dollar was rallying, the corporate profit outlook was bleak, and it seemed like the central bank's best chance had passed.

Read More Druckenmiller: Here's how Fed 'bubble' will end

However, stocks bounced back strongly in October and concerns over China and elsewhere seemed to dissipate.

Then, Friday's nonfarm payrolls report showed the U.S. economy had created a net 271,000 jobs in October, the unemployment rate had fallen to 5 percent and average hourly wages had grown 2.5 percent year over year, the largest such gain in more than eight years.

Suddenly, a rate hike was back on the table.

Read More Blowout jobs report puts ball back in Fed's court

Traders on Monday were pricing in a 70 percent chance of a quarter-point move at the Dec. 16-17 FOMC meeting, according to the CME Group's FedWatch tracking tool.

"Anyone who follows the US economy knows the Fed is going in December," Steve Blitz, chief economist at ITG Investment Research, said in a note. "The excuses to wait are gone, especially now that they find themselves in a sweet spot of better economic news, domestic and global."

Monday, however, brought another reminder of what could stop the Fed: an upset market.

Stocks tumbled in morning trade, with the and Dow Jones industrial average both shaving more than 1 percent, while bond yields jumped, sending the five-year note to 1.76 percent and the benchmark 10-year to 2.36 percent, its highest since July 20. Rate-sensitive banks actually outperformed during the decline, down about 0.8 percent near midday.

Read More Chances of 'unexpected recession' rising: Paulsen

With financial markets calling the Fed shots these days, continued turmoil would be the one element that could keep the FOMC on the sidelines to close 2015.

Citigroup economist William Lee is one of many Wall Street voices who believe the time has long since come for a rate hike, though he's skeptical about whether Fed officials will have the fortitude to move ahead.

"This FOMC has repeatedly demonstrated they can be distracted easily from their macro dual mandate objectives by market events," Lee said in a note Friday. "So hang on — maybe they will surprise us by actually doing what they say they intend to do!"