Assessing the hawkish FOMC minutes suggests that a June rate hike is a very real possibility, but is still unlikely. For now, the this may have changed the game for the dollar but it could once more be a case of strength in front of a disappointment again. The dollar has strengthened as the market has needed to re-price the possibility of a June rate hike. But how realistic is a June rate hike? The data dependence will be huge now in the coming weeks, but that is not the only factor to consider.
Sections of the FOMC minutes that were revealed last night suggest that the Fed needed to prepare the market for a possible move, but that does not necessarily mean that there will be a hike in June. The section below shows how the committee discussed the need to tighten the language. This may simply have been a nod to the fact that just recently the market had moved to almost entirely price out the possibility of a hike in June and made even a hike in December a toss-up. The market does tend to be rather extreme in its moves sometimes and at several points in the minutes, the Fed notes that the market was factoring in an overly accommodative monetary policy.
This is another section that the market appears to have move on. It talks about economic growth picking up in Q2, strengthening labor market and inflation progress.
So it would appear that the Fed is very much data dependent. However, what is the data telling us? Since the FOMC meeting in April:
- Non-farm Payrolls were mixed, dropping to 160,000 which was a seven month low whilst the March data was also revised lower by 7,000. Labor force participation also dipped back slightly to 62.8 after 6 months of improvement.
- Inflation has been mixed as the recent positive trends have just fallen over. The core PCE fell back to 1.6% (after two months at +1.7%), whilst the core CPI has now fallen back to +2.1% (down two months in a row now from +2.3%). The Average hourly earnings have though gained some traction picking up to +2.5%.
- Growth indicators have though been positive, especially in the wake of the larger than expected retail sales data, which has driven the Atlanta Fed’s GDPNow model (which was very close to calling Q1 GDP) to now stand at +2.5% in Q2.
The data therefore, is not screaming out for a hike. Aside from the impact of the retail sales data on growth there has not been the improvement in inflation that the Fed has been after, whilst the Fed also mentioned in the minutes that trade continued to be a drag on real GDP.
However, this section below would suggest not to get too far ahead in expectations of a June hike. The risks are still there and these are playing on the minds of the FOMC doves.
This is a clear indication that the uncertainty of the impact of a possible Brexit is a real concern. The June FOMC meeting is held on 14th to 15th June which is just over a week before what could be a significant risk event of the UK’s EU referendum. Would the Fe really hike in front of this? However perhaps the committee would also take account that the Presidential election is in November and this could leave the Fed open to political bias if there is a hike in September, but the risks of significant market disruption of turmoil in the EU if the EU does vote to leave could be a significant reason behind why the Fed will not move.
Although June is now apparently a “live” meeting, and data dependence will be crucial. Unless there is absolutely compelling reason driven by a significant increase in inflation, I still think that the Fed will not hike at the next meeting.