Fed: No action this week, greatest odds for next rate hike in September - RBS

Research Team at RBS, had expected uncertainty surrounding the Brexit vote to keep this cautious Fed on hold in June.

Key Quotes

“However, even if there were no vote in the UK, the weak May payroll report would have precluded Fed action this week. As Yellen said in her speech on June 6, “new questions about the economic outlook have been raised by the recent labor market data.” In the past, when questions about the outlook have been raised (e.g. after China devaluated last August or financial conditions tightened in January/February), it has taken several months for policymakers to feel confident enough to act. Given that Fed Chair Yellen has continued to espouse on a risk management policy approach (better to move too slowly than to raise rates too quickly) we do not believe the Fed would act as soon as July, even if the June jobs report were to show strength. We assign higher odds to the next Fed rate hike coming in September.

In any case, more insight as to the likelihood of a move in July may be gleaned this week from the Fed’s “Dot Plot” (which shows each participant’s estimate for the year-end fed funds rate assuming appropriate policy). We assume that policymakers in June still favored a slower pace of rate hikes (i.e. slower than the once-per-quarter clip they felt was appropriate at the end of last year), so that those policymakers who believed no action would be warranted until September would likely to anticipate only one hike by the end of 2016 (as opposed to two). Thus, in our opinion, the greater the number of participants who shift their “dot” for year-end 2016 from 0.875% to 0.625%, the less likely the Fed is to act in July. Our expectations for the FOMC fed funds rate projections are shown below.”