Is The Fed Ready To Hike In June?

by: Lior Cohen

Summary

The FOMC didn't change its policy in the recent meeting.

The statement left out the concerns over the global economy.

Is the market even ready for a rate hike in June?

The FOMC didn't hike its cash rates in its recent meeting, but the committee also decided to omit its concerns over global economic conditions. Despite this omission the market isn't convinced the Fed is ready to raise rates in June.

In the previous meeting back in March, FOMC members addressed the risks related to global economic and financial developments. This time, the FOMC seems to think that within six weeks the global economic risks have dissipated or at the very least aren't needed to be addressed in the statement. Instead, the committee only stated it will continue to monitor market developments:

"The Committee continues to closely monitor inflation indicators and global economic and financial developments."

The statement still included the same concerns about the softness of business fixed investment and net exports, the slower growth in household spending, and that inflation continues to run below the Fed's 2% target. All the while, real income keeps rising, consumer sentiment remains elevated and the labor market remains strong. But as long as growth isn't picking up (the recent GDP for Q1 showed a meager growth rate of 0.5%) and inflation keeps running below the 2% target, and inflation expectations don't change, it makes little sense to start raising rates.

In any case, FOMC member Esther George, yet again, was the only dissenter and thought rates should have been raised in this recent meeting by a quarter of a percent.

The decision of the FOMC to maintain its policy unchanged came a day before Bank of Japan also decided to keep its interest rate flat and push to a later date its goal of reaching 2% inflation; although the market expected additional monetary stimulus in the BOJ's latest meeting. Following this news the yen sharply appreciated against the U.S. dollar. And now that the market also believes the Fed may not raise rates in the coming months, the U.S. dollar may continue to devalue against its peers. According to Fed Watch, the current odds of a June rate hike are only 11%, which are the lowest levels this year; for a single 25 basis points rate hike or higher in December the chances are only at 60%.

Click to enlarge

Source: Fed Watch

In conclusion…

The market is still unconvinced the Fed will push the hike button anytime soon, let alone in June. And considering the fragility of the financial markets, low inflation, and the slower growth in the U.S. economy, it makes sense for the Fed to keep interest rates unchanged in the coming meetings. For the Fed to actually move towards raising rates in June it will have to be clearer -- as it was back late last year before raising rates in December -- and to shift expectations, which clearly show little chance of a rate hike. For more please see: What Does the Fed Say?

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.