FOMC Preview: I know what you did last summer – Rabobank

Philip Marey, Senior US Strategist at Rabobank, suggests that while the Fed is in a wait-and-see mode to assess the threats to the global outlook and the strength of domestic momentum, recent US data have boosted the Fed’s confidence.

Key Quotes

“The FOMC meets on July 26 and 27. There will be no press conference nor an update of the economic projections. So we only have the formal statement to look forward to. The Committee is likely to stress the strong Employment Report for June. This report and other encouraging recent data have reflated the Fed’s confidence. Fed speakers may in coming weeks try to create the impression that September is a live meeting.

However, in reality the Fed is in a wait-and-see mode to assess the threats to the global outlook and the strength of domestic momentum. We expect the Fed to squeeze in one rate hike before the end of the year, most likely in December. Given the elevated level of uncertainty about the outlook and the Fed’s cautious approach, September may be too early for the next hike.

The next meeting takes place on November 2. In the previous hiking cycle – which consisted of one hike at each meeting– the Fed did hike during the election months. Interrupting the cycle for the elections would have suggested a lack of central bank independence. However, this time the Fed is taking the term ‘cycle’ very loosely. We have seen only hike so far, in December 2015. Therefore, deciding to hike for the first time in almost a year less than a week before Election Day (November 8) may be stretching the interpretation of central bank independence.

Also note that this meeting does not have a press conference to explain the decision in more detail than a formal statement. What’s more, the outcome of the elections may in itself pose a risk to the Fed’s outlook for the economy. In fact, Brexit is likely to have elevated that risk in the minds of the FOMC participants, as the root causes may not be entirely unrelated.

All things considered, we think that December is the most likely date for a rate hike this year. If the US economy continues to grow despite the increased headwinds, slack in the labor market will diminish and the FOMC will try to squeeze in one rate hike before the end of the year, if possible.

However, a December call also means that the risk of the FOMC not hiking at all in 2016 is substantial. In fact, the Fed’s use of the word ‘hiking cycle’ looks increasingly stretched. A few more negative surprises and the FOMC may be forced to take a (formal) pause.”