June FOMC Recap
- The Fed were adopting a very cautious stance ahead of the UK’s EU membership referendum and cautioned that a vote for Brexit would likely cause significant damage to both the US and global economies.
- Referencing data over the period the Fed noted that whilst growth was indicated to be picking up the labour market had slowed. Growth forecasts however were revised lower for the year to 2% from 2.2% prior whilst inflation forecasts were revised higher to 1.4% from 1.2% prior.
- This rather muted meeting saw the Fed striking a less Hawkish tone and USD sold off accordingly. USD has recently recovered however and is trading into the upper half of the last 18 months range ahead of tomorrow’s meeting.
Data & Developments Since
Since that meeting we have of course seen the UK vote for Brexit which was followed by a period of wild volatility that in the days after. With the Fed having warned against Brexit and the likely damage to the US economy on the back of such a decision, the Fed’s assessment of the new environment will be key for traders looking to gauge the likelihood of any rate rise in the coming months or indeed this year at all.
Rate hike expectations had been reduced in recent months as US data hit a rough patch and employment markers especially saw a string of poor readings. However, data sets over the last month have notably picked up with headline readings including:
- Strong July Manufacturing PMIs
- Strong Core CPI in June
- Strong Industrial & Manufacturing Production over June
- Strong ISM (both Manufacturing & Non- Manufacturing
- Strong Q1 GDP
- June NFPs 282k vs 180k expected
Despite this slew of positive data the Fed will of course need to see more post-Brexit data before they can accurately assess how that situation has affected the US economy and subsequent implications for the outlook.
Alongside this data we have also heard from various Fed members which , despite some Dovish sentiments, have kept USD bid amidst talk of the potential for at least 1 -2 rate hikes this year.
Philadelphia Fed president Harker noted that he still sees two rate hikes this year and that “Brexit is low on my list of risks”. Fed’s Bullard struck a slightly less hawkish tone saying that he feels the US has entered a persistent period of low growth, low inflation and low unemployment and that only a single rate rise is likely to be needed in the foreseeable future. Finally, Fed’s Dudley urged yet greater caution, highlighting the uncertainty of the current environment and noted that the Fed “are data dependent”. We’ll see how it goes”
Expectations For This Meeting
- Whilst there is no doubt that recent data has certainly started to move in the right direction, the Fed is certainly likely to want to allow for more data to be assessed before it looks to act.
- Some analysts are pointing to a September rate move whilst other are looking at December as being the strongest candidate because by that point the Fed will have gathered over half a years’ worth of data post-Brexit on which to make a decision.
- Referencing the data, the Fed is likely to acknowledge recent positive developments, especially in labour market conditions, although the underlying trend in job growth is still down.
- The statement is widely expected to be much the same as last time around with the Fed striking a tone of caution and highlighting their wait and see stance as they look to ride out US election uncertainty and allow for more post-Brexit data to be assessed.
- Given the global and domestic risks posed by Brexit and associated market volatility and investor uncertainty it’s reasonable to expect that Fed will refrain from signalling a rate hike in coming months or using any sort of timing reference however, with Financial markets having responded so robustly in the wake of Brexit, these risks might be downplayed somewhat, such as we saw from the ECB last week.
- Any reference to a lessened Brexit impact is likely to be USD positive as investors take that as a positive for rate hike chances. And really that is likely to be the outcome of this meeting. Expecting a fairly neutral statement with a mildly hawkish tilt likely to see a slightly firmer USD on the back end. Only risk to this is if the Fed reference any greater impact from Brexit or worsening of the outlook.