Fed: Don’t rule out June – UOB

Alvin Liew, Research Analyst at UOB, notes that the April FOMC minutes is read as hawkish with most Fed participants explicitly naming June as “likely would be appropriate” to raise rates provided the US economic growth pick up in 2q.

Key Quotes

“The US Federal Reserve have put back a potential June rate hike into play again with its April 2016 FOMC meeting minutes.

At the same time, we have some FOMC members expressing concerns that “the likelihood implied by market pricing that the Committee would increase the target range for the federal funds rate at the June meeting might be unduly low.”

There were 6 mentions of the June meeting in a policy context in that short amount of text. And with several district Fed Presidents in recent weeks, reiterating the June meeting being a “live” meeting and not to rule out a mid-year rate hike, this in our view means that the possibility of a June rate hike is certainly not dead yet. And not surprisingly, the odds for Fed rate hike action in June jumped. Based on trading in futures and options data compiled by Bloomberg, the probability of a 25bps Fed rate hike in June 2016 FOMC lunged higher to 32% (18 May) from just 4% at the start of the week (16 May) while the chance of a July hike also jumped to 47% (from 19.4% on 16 May).

We are keeping our projection for the US Fed policy trajectory to remain at two 25bps rate hikes in 2016 (one in each half of the year – at the 14/15 June and 13/14 December FOMC meetings) to bring the FFTR to 1% by end-2016. But nothing is cast in stone and there remains a lot of uncertainty on the 2016 outlook and importantly, the risk still looks tilted towards the downside so we may yet see a shallower rate trajectory. That said, barring any external risk event, we believe that the Fed will do at least one hike in 2016 (not zero), probably pushing that decision right to the end in the December FOMC if needed, just like in 2015.”