To little surprise for most of Wall Street, the Federal Open Market Committee decided on Wednesday
to keep rates near zero.
The FOMC has four more meetings scheduled for this year — July, September, October, and December — but only the September and December meetings will have press conferences.
Many on Wall Street believe that this automatically rules out July and October for any action.
With notes pouring in from all of the top Wall Street analysts, the majority seem to still be confident in an initial 0.25% hike in September, followed by another 0.25% in December. But not everyone feels this way.
For a big overview, here’s when Wall Street’s leading economists think the Fed will raise rates and what they’re saying about potential Fed action:
The FOMC leaned in the dovish direction at its latest meeting, with a slightly more bullish statement more than offset by downward revisions to forecast. We reaffirm our long-standing call for a September liftoff, with a higher risk of later rather than sooner… Going into the meeting some analysts argued that if the Fed planned to hike in September they would want to signal that at this meeting. We strongly disagree. Clearly the Fed wants to maintain its optionality as long as it is not misleading the market.
The Fed says the economy is still on track for them to raise rates in 2015. The devil is in the details though as we need to know what meeting. The consensus for September liftoff has come undone. There are an increasing number, seven out of seventeen, who say December or later now. For our money, we still think a rate hike by September. It all depends on the data, the data being unemployment. We think unemployment will be at 5.2% by the time the Fed meets in September and are taking Fed Chair Yellen at her word that policy could speed up or slow down depending on the economy.
Chair Yellen's lack of confidence in the outlook stands in stark contrast to the contents of the FOMC statement and projections, the latter of which were largely in line with our expectation and support at least one rate hike this year. We maintain our outlook for a September rate increase, given our confidence in the strength of the incoming data and our outlook for acceleration in private consumption, but the Chair's less-than-inspiring performance suggests the bar for rate hikes is higher than it was and could, yet again, result in a further shift of the goal posts.
As Fed officials left their interest rate projections for this year unchanged, it appears that the FOMC is still on course for a September lift-off. The 0.63% median of those projections implies that the Fed will raise rates twice this year - presumably at the September and December meetings, which have scheduled press conferences and forecast updates. But officials appear almost equally split between one, two or three 25 basis point rate hikes this year.
Chair Yellen said little to encourage the view that monetary policy will start normalizing in September, but this year was a definite possibility. Nevertheless, we have shifted our December call to September. We have changed our view because of compelling evidence that moderate growth may be sufficient to close the output gap in the medium term because potential growth has slowed significantly since 2008. Moreover, we are concerned that the buildup of financial imbalances may manifest in disruptive rate volatility, notwithstanding Fed communications to the contrary.
Strong data on job creation in the US continue to suggest strongly that the current stance of Fed policy is too loose, even taking into account tempting reasons to delay the start of normalization. Indeed, the question is less 'Will the Fed tighten this year?' and more 'How aggressive will the Fed tightening cycle become?'… We maintain our call for 25bp rate hikes in both September and December this year.
Yellen remained largely balanced in her post-meeting press conference, and there was little indication that the Chair had altered her trajectory for the timing of liftoff. In fact, the Chair continued to de-emphasise the timing of liftoff and stuck to the shop-worn script that liftoff would likely occur later this year. In doing so, Yellen is providing further confirmation that economic conditions no longer warrant crisis-level interest rates. Hence, we continue to favour a September rate hike.
Following (Wednesday's) FOMC meeting we are pushing back our forecast for the first Fed rate hike from September to December 2015. In large part this reflects the fact that the number of FOMC participants projecting one hike or less this year rose from three at the March FOMC meeting to seven today. While we cannot be certain, our best guess is that Fed Chair Yellen now anticipates only one increase this year -- an important shift in the committee's center of gravity.
In a decided shift toward a less aggressive pace of policy tightening, members of the FOMC lowered their average projection for the appropriate level of the federal funds rate from 2015 through 2017. We believe this is in reaction to a deterioration in international economic conditions that have adversely affected the outlook for US GDP growth, while simultaneously lowering the outlook for inflation. We hold to our view that the FOMC will wait until December before hiking the federal funds rate 25bp. For 2016, we expect an additional 50bp of tightening rather than the 100bp median projection of the FOMC members.
We hold September as our base case for the timing of liftoff following (Wednesday's) FOMC communications. Given changes to participant rate projections and the tone in Chair Yellen's press conference, we see a much lower probability than previously that the committee will move ahead of September…Our conviction in September liftoff is driven by the belief that growth and labour data should surprise on the upside near-term.
At the conclusion of its June 16-17 meeting the Committee left enough uncertainty in place to leave markets guessing how many rate hikes the Fed can deliver this year. What the Committee did not leave up to interpretation is its unwavering message that the pace at which it raises its target level for the federal funds rate will be gradual. We continue to expect the Fed to embark on a policy tightening cycle in December this year, and believe its new expected path looks more reasonable.
Taken together, (Wednesday's) statement, the updated economic projections, and Yellen's remarks are consistent with PNC's forecast for the first increase in the Federal funds target rate to come at the FOMC's mid-September meeting. This would allow time for inflation to start picking up, now that energy prices have stabilised, and for another couple of months of improvement in the labour market. The Fed funds rate has been at its current, near-zero level since late 2008. PNC is forecasting another rate hike at the December FOMC meeting.
The policy statement and the Fed's economic projections are consistent with the Fed raising short-term interest rate once or twice by the end of the year; however, policy action will be data-dependent… There is no need for the Fed to hit the brakes; however, with an eye toward where the economy is expected to be in the second half of 2016, it should be appropriate to begin taking the foot off the gas pedal by the end of this year
The main takeaway from today's FOMC meeting is that the hurdle for a lift-off in rates appears to be quite low; but the pace of tightening will be very gradual. The FOMC lowered its growth projection for this year to just 1.9%, and yet the Committee still expects to lift rates before the year is over. The median projection suggests two hikes this year, although the set of dots believed to capture the FOMC core (Yellen, Dudley, Fischer) is squarely in a one-hike camp, consistent with our own forecast.
Despite the equal number of members forecasting each outcome, the downshift in the forecasts for March is likely enough to cause some market participants to reassess the start and/or pace of tightening. After all, the average of the forecasts for year-end 2015 is now just under 57 basis points, a decline of about 20 basis points versus March. Indeed, the Fed funds futures market shows a drop in the probability of a rate hike in September (from roughly 65% to around 50%). We continue to expect the first rate hike at the September FOMC meeting followed by one additional rate hike at the December FOMC meeting.
While the Fed remains cautious, (Wednesday's) policy statement and outlook suggest that the U.S. economy has solid underlying momentum and is strong enough to withstand the first rate hike in nine years in the not-too-distant future. Admittedly depressed today, consumer inflation is poised to increase substantially in 2016, in part, on reduced labour market slack and low base effects. We suspect the Fed may be starting to think inflation pressures will be harder to contain going forward and, as such, a rate move in September is still looking like a probable outcome.
While there have been a few stronger economic releases out there (such as the employment report and retail sales), they have not been consistently strong enough for the Fed to more explicitly change its forward guidance towards a higher probability of a September or December interest rate increase, even though it continues to keep these options wide open… In our view, this has been the right outcome for this meeting given that the risks of tightening too soon still outweigh the risks of waiting a little longer, particularly when there is still plenty of room for inflation to run a little hotter for a while, further progress to be made on raising employment and income levels, not to mention the fact that the stronger dollar has already acted to tighten financial conditions, while the benefits from the fall in the price of energy and other commodities have yet to result in higher spending rates from the consumer.
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