In its latest FOMC policy statement, the Fed did not provide any clear hints that a September rate hike is coming. Nevertheless, this doesn’t mean that it won’t happen, especially since the statement sounded a bit more upbeat on the economy.
The policy statement was largely unchanged, with only some minor tweaks to acknowledge the improvement in the economic data. The housing sector is described as showing “additional” rather than “some” improvement, jobs gains are now thought to be “solid” and the unemployment rate is “declining” rather than “remained steady” as before.
These tweaks fall well short of a clear hint that a rate hike is coming at the next meeting in September. Note the Fed flagged up a hike at the meeting before the first rise in the tightening cycle in 2004. Nonetheless, Yellen has recently stressed that each meeting is “live” and “data dependent” so this was always unlikely. The more positive tone of the statement is a sign that the first rate hike is coming closer.
Given that in June 15 of 17 officials expected rates to rise this year and 10 of 17 anticipated two 25 basis-point increases, there’s a good change that rates will rise at two of the three meetings left this year. September is very much in play, especially if international risks continue to recede and core inflation continues to strengthen.
Our view is that the Fed will raise rates at the September meeting and to 0.50-0.75% at year-end. Perhaps more importantly, stronger wage growth and core inflation will prompt rates to rise by more than currently anticipated by the markets, taking them to 2.25-2.50% by end-2016.