Fed: Nearly impossible to raise rates in June – RBC CM

Research Team at RBC Capital Markets, suggests that while recent Fed rhetoric and a surprisingly hawkish set of Minutes for the April meeting have certainly forced implied rate hike probabilities higher throughout the 2016 horizon, we still think it is nearly impossible for the committee to raise rates in June.

Key Quotes

“The cost/benefit analysis is heavily skewed toward the cost in this case. With Brexit polls in many cases within the margin of error, the committee cannot, at this point, risk a hike that is followed up by a vote to leave. They would effectively risk the mother of all policy mistakes for the negligible benefit of tightening just 1.5 months ahead of the next meeting. While our core view is that the most likely timing for the next hike is December, we also acknowledge that most on the committee are now likely viewing July as a potential sweet-spot for raising rates.

The Brexit outcome will be known by then, and it is far enough away from the implementation of Money Market reform that the committee will not have to worry much about adding another layer of complexity to what could be volatile short-end markets (this rules out a September hike, in our view). From a “messaging” standpoint, note that the advance read of Q2 GDP is due out just two days after the July meeting. The committee will by then have a pretty good handle on what the quarter will look like—selling the idea that growth is picking up with a 3% Q2 GDP on the follow would make for very good optics indeed.”