Time seems to be running out for the Fed to meet its stated goal of two rate hikes in 2016. Odds of a Fed rate hike this Wednesday is 0%, according to the Fed funds futures market. While there are still five FOMC meetings this year, the Fed in effect has far fewer opportunities to raise benchmark interest rates in 2016.
No one really expected an April rate hike, no matter what the talking Fed heads said. Enough time hasn't passed to be able to discern whether weakness in the US economy during the first quarter was temporary of not. There won't be a post-announcement press conference by Yellen this week, so traders and analysts will have to glean some sort of guidance from the official statement. Despite the big push by the Fed to get the markets to believe in two rate hikes this year, the lack of a forward guidance statement or dot plot this month may make it difficult.
While markets are giving a 23% chance for a Fed rate hike in June, I believe that the Brexit vote in the UK will take a hike off the table. The June FOMC meeting is only eight days before the Brexit vote. A win by the "Exit" side is widely expected to throw global markets into turmoil. Depending on hos severe it is, the Fed may even be forced to roll back the December rate hike.
Since the Brexit vote comes a week after the FOMC meeting, expect Yellen to provide lots of forward guidance in her post-meeting press conference.
In our opinion, this is the first real chance the Fed will have to raise rates in 2016. The FedWatch tool (which updates constantly) is giving a 37% chance for a Fed rate hike in July. The FOMC meeting on the 26th and 27th will be sandwiched between the European Central Bank's (July 21) policy meeting and the Bank of Japan's on the 28th and 29th. ECB president Mario Draghi could very well set the expectations for both the Fed and the BoJ.
One factor against a Fed rate hike in July is that no presser by Yellen is scheduled. Common wisdom says that the Fed wouldn't risk the volatility of a rate hike without Yellen addressing the media to clarify the Fed's position.
The Fed takes the dog days of August off, with the next meeting scheduled for September. This is the first FOMC meeting since June where Yellen is scheduled to speak, and probably the most likely date for the second Fed rate hike. Markets this week are giving about a 50/50 chance of a September rate hike, but we have four months of economic news and events between now and then. A wild card in this prediction is the Bank of Japan. It is holding its policy meeting the same two days as the Fed -- September 20th and 21st. Their meeting will wrap up early in the morning of the 21st, giving the Fed some immediate info on the BoJ's policy direction.
Does anyone really believe the Fed would hike interest rates 2 days before the Presidential election? Me neither.
December 14 is the last chance for the Fed to hike rates in 2016, and realistically, probably only the second time they have a decent window of opportunity. While the thought of a Christmas rate hike seems unlikely at first blush, the only rate we have actually had came in December. If December ends up being the only rate hike for 2016, the Fed's credibility is going to take a huge hit.
(* = Yellen Press Conference)
Tale of the Tape
Assuming the economy continues on as it has so far, and other central banks keep a handle on things, we see September and December as the only two real candidates for a Fed rate hike in 2016. December would be almost three months after a September rate hike, and should give the Fed enough feedback to decide whether to go for a repeat in December.
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