Fed: Markets doubt about commitment to raise interest rates - BBH

The markets have doubted the Fed's commitment to raise interest rates since the start of the year as perhaps it reflected, in part, the disappointment after the dot plots had suggested four hikes in 2016, and only one was delivered, explains the analysis team at BBH.  

Key Quotes

“The markets were skeptical of the March hike until officials launched a full court press to convince it otherwise.  Officials needed less of a campaign about the June hike.  It is a possible third hike this year that the market is now skeptical of.”

“On June 15, a day after the last FOMC meeting, the September Fed funds futures contract implied about an 18% chance of a hike, according to the CME.  It had fallen a little below 10% before the retail sales and CPI reports before the weekend.  There is now almost an 8% chance of a hike priced into the September futures contracts.”

“The market is skeptical of a December move but less so than after the June hike.  A month ago, the market had discounted about a 41% chance of a hike.  The pricing implied a 47% chance before the pre-weekend data, which spurred a reassessment that brought the odds down to almost 43%.”

“A consensus on reducing the balance sheet appears to have emerged before officials seem prepared to hike rates again.  Many of the Fed officials' word cues continue to suggest a desire to begin its balance sheet operations soon.  Given the perceived need to guide investors understanding, it is preferable to make such an announcement when there is a scheduled press conference.  That makes September a likely candidate, and allows officials time to monitor the evolution of price pressures.” 

“Growth forecasts have been trimmed.  Currently, the Atlanta Fed's GDPNow tracker sees 2.4% growth for Q3, while the NY Fed's tracker puts it at 1.9%.  Two points ought to be kept in mind.  First, such growth rates may seem slow, but those rates are at or slightly above what Fed officials regard as trend growth, which is a pace that is associated with stable prices.  The key reason for lower trend cited by Yellen was demographic.”

“Second, an overall measure of growth (GDP) may not be the end all and be all that the media often makes out, as we may have remembered from Econ 101.  Monetary policy is the necessarily the driver of some important parts of GDP, like inventories or the net export function.  Policymakers may be interested in the GDP measure that captures final domestic demand.”

“The US economic data in the week ahead does not have the heft to alter investor sentiment.  If anything, it may deteriorate further.  The healthcare reform bill in the Senate remains stymied by the lack of agreement among the majority party, and the reluctance to try offer measures that would appeal to Democrats, who are prepared to fix rather than repeal and replace the Affordable Care Act.  That there still are not even votes to pass the Republican measure with a simple majority has led to the postponement of the vote that was tentatively slated for next week.  One Senator's recovery from eye surgery is being cited as the ostensible reason for the delay.”

“More revelations about President Trump's son's meeting, which now appears to have included a former-Soviet counter-intelligence officer, warns of an increasing distraction from the economic agenda.  With the Speaker of the House still pressing to include some version of the Border Adjustment Tax, and opposition in the Senate and the White House, skepticism that tax reform can be done this year appears to be growing.”