FOMC Preview: Forget June - ING

Rob Carnell, Chief International Economist at ING, suggests that the coming 15 June FOMC meeting has been utterly torpedoed by last week’s dreadful payrolls figures.

Key Quotes

“Indeed, even the possibility that the Fed would pause in June, but signal their intent to move imminently, is now looking very doubtful. Before the payrolls release, we believe the necessary economic and financial conditions for the Fed to tighten again were already largely fulfilled. But where there were some lingering doubts about the pace of economic activity, these questions remain unanswered. And the labour market “box”, which had been “ticked”, has now “un-ticked” itself. Throw into the mix concerns surrounding financial market conditions leading up to and potentially following the UK Brexit vote, and even a July hike is looking difficult. We are sticking to our long-standing September hike call. But this is far from a done deal. Markets are pricing in nothing until December.

• Markets have been consistently under-pricing the degree of tightening from the Fed relative to the Fed’s own guidance on rate policy this year.
• Whilst the data ran soft in 1Q16, this was not so much of a problem.
• But with data in early 2Q16 firming up and markets still not responding, the Fed may have felt obliged to step up its efforts at guidance to encourage a more realistic assessment of the forward rate profile.
• Our interpretation of the Fed’s actions in May were that it was trying to bring the market into line with the prospects for two rate hikes this year, rather than signal any intention for a rate hike in any particular month.
• The April FOMC minutes also made markets re-think the prospects of a June hike, and was matched by growing hawkishness of some Fed members.
• That was until the data, especially payrolls, took another turn for the worse.
• FOMC minutes and earlier hawkishness is now irrelevant.
• Yellen’s 6 June speech also made it clear that a June hike was off the table. But left the door open a crack for a July hike, though September is more likely in our opinion.
• Add to this some added caution due to the Brexit vote in the UK, which could lead to a tightening of financial market conditions and current market pricing of the probability of a June or July rate hike looks appropriate.
• It is likely that the Fed statement on 15 June will try to leave all options open. The Fed clearly wants rates to be higher, but it will need to justify any future move with reference to the economy, and at the moment, the data simply does not give them the leeway to hike again.”