Timing of the next Fed rate hike

Timing of the next Fed rate hike

2019-11-11 • Updated

Investors are always concerned with the question of when the Fed will raise interest rates. The timing of the next hike is a balancing act between the need for preemptive policy to stave off heightening inflation rates against the need to let labor market strength continue to eat away at any residual underemployment. Everyone who needs to determine the odds of rate increases at the upcoming meetings should look at the economic data releases reflecting the performance of country’s economy. So, we did skim through the key data and noticed some distortions that would probably divert Fed’s policymakers from hiking in June.

CPI figures – the well-known bedrock behind the Fed’s rate hiking intentions – fell for the first time in 13 months. The headline fell short of market expectations having printed at -0.3%.  US retail sales decline 0.2% last month marking the worst two-month stretch in two years and warning traders of the softness in the first-quarter US growth data (will be released on this Friday). Core CPI numbers dropped 0.1% as if they wanted to remind the Fed, that they won’t always be at its targeted levels and that there shouldn’t be any sense of urgency for the Fed to raise rates.

Consumer confidence declined to 120.3 in April from a revised 124.9; the March jobs report had a weaker-than-expected headline. The soft data won’t knock the Fed’s officials off tightening course, but it may retard it.  

According to BofA analysts, next rate increases will likely be approved at the Fed's September and December meetings in 2017. Then, the Fed will likely proceed with shrinkage of its balance sheet.

BofA believes that the Fed will signal about its readiness to trim $4 trillion portfolio in September. In December, it will release a formal balance sheet reduction plan and final changes will be made public in March 2018. The announcement of the balance sheet reduction is a tightening measure. So, it might have an impact equal to a 25 bp rate hike.

Market participants seem to be more optimistic about June rate increases than banks’ analysts. The CME Group FedWatch reflects a 68% probability of a hike in June.

 

The main focus will be on the upcoming US labor and inflation data. If it is not strong enough, there won’t be a rate hike in June.

The US dollar has weakened in the past weeks. The US dollar index was steadily falling since the beginning of this year. It found support at 98.70, and now it is hovering around 99. 

 

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