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27 Apr 2015
FOMC Meeting: Fed rates dilemma, to be ‘june’ or not to be ‘june’? – ING
FXStreet (Barcelona) - Rob Carnell, Chief International Economist at ING, explains that the real problem for the Fed at this FOMC meeting will be whether to rule out a June hike or not, with markets currently pricing in a September fed rate hike.
Key Quotes
“We see the real problem for the Fed this time being that they cannot reasonably rule out a June hike at this meeting, even if it looks unlikely. But this leaves them with yet another textual problem for the statement. At the March meeting, the Fed dropped its reference to “patient”, but then ruled out an April rate hike saying. “Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting”
“This now looks like it was an unnecessary precaution to prevent markets rushing to price in an April hike. But it also means that if they want to leave their options open, and do not repeat the same process by ruling out a hike in June (which would seem odd given how much the economic story may change between now and then), then there may well be a market swing back towards a more imminent hike.”
“Financial markets currently price in a rate hike at the September meeting (20bp average effective Fed funds for September, with rate decision on the 17th and current effective Fed funds of about 11bp), so this could see markets pricing in an earlier hike (July?), with consequent upwards pressure on the yield curve from 30 days to 2 years, and upwards pressure on the USD.”
“The longer end of the yield curve is harder to call, since this will be jointly determined by the response of the stock market, and this might well see yields fall if stocks respond badly.”
“What actually happens in June remains a mystery that only the run of data in the coming weeks will eventually reveal. But the short-term response to leaving June in play at this week’s statement might cause markets to rethink their recent pessimism.”
Key Quotes
“We see the real problem for the Fed this time being that they cannot reasonably rule out a June hike at this meeting, even if it looks unlikely. But this leaves them with yet another textual problem for the statement. At the March meeting, the Fed dropped its reference to “patient”, but then ruled out an April rate hike saying. “Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting”
“This now looks like it was an unnecessary precaution to prevent markets rushing to price in an April hike. But it also means that if they want to leave their options open, and do not repeat the same process by ruling out a hike in June (which would seem odd given how much the economic story may change between now and then), then there may well be a market swing back towards a more imminent hike.”
“Financial markets currently price in a rate hike at the September meeting (20bp average effective Fed funds for September, with rate decision on the 17th and current effective Fed funds of about 11bp), so this could see markets pricing in an earlier hike (July?), with consequent upwards pressure on the yield curve from 30 days to 2 years, and upwards pressure on the USD.”
“The longer end of the yield curve is harder to call, since this will be jointly determined by the response of the stock market, and this might well see yields fall if stocks respond badly.”
“What actually happens in June remains a mystery that only the run of data in the coming weeks will eventually reveal. But the short-term response to leaving June in play at this week’s statement might cause markets to rethink their recent pessimism.”