A Rate Hike By The Fed Is Not A Done Deal

Despite the strong suggestion by the Fed that it will increase rates in June, two events could cause it to hit the pause button.

 
 

The Federal Open Market Committee mentioned June several times throughout the FOMC minutes released Wednesday, and the specificity about a June rate increase caught traders by surprise. Dow futures were down approximately 45 points in pre-opening trading on Thursday and global markets were down overnight. Bond prices were close to unchanged.

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The Fed did say a rate increase would be subject to economic data and market conditions, but there is little reason to think weak data could cause the Fed to hit the stall button again. We’ve had mostly better-than-expected data since the April meeting and only the next jobs report will be relevant before the Fed's June 15 decision. Even if payrolls grow by 150,000, that is sufficiently strong enough to keep the Fed in play.

The Fed left itself one big out — the same one that prevented a March rate increase and perhaps a few more increases before then. That out is global financial conditions. With four weeks left until the next FOMC meeting, anything can happen in the global markets, but the British vote to exit the euro is the most likely source of trouble. The vote will not be until June 23. If the outcome is still in doubt, then the Fed is unlikely to risk raising rates.

Read more about what to expect in early June and the one other event that could change everything.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

 
 

May 19, 2016


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