All eyes will be on the Federal Reserve Open Market Committee next Tues/Wed as we expect some clarity with regards to monetary policy. It is known that we are much closer to a rate hike cycle than we have been in quite some time. However, let’s not assume the Fed will just raise rates for a symbolic reason – if they do not see inflation expectations rising, then they won’t move – period!
As I have been talking about lately the Fed Funds Futures are a great indicator, and tell us what the market expectations are for policy. While many will ignore these futures prices, that is not really a good idea. After all, the Committee are all believers in free markets, and as such respect price, supply and demand.
For the better part of five years I have had little interest in following the futures (link below). Once ZIRP (zero interest rate policy) came into existence it was all about time. Chair Bernanke and now Chair Yellen would err on the side of conservatism, and will wait as long as possible until objectives are met (price stability and full employment, their two mandates of Congress).
Current Fed Funds Futures
The futures market sees a 25bps rate hike coming by December, a second rate hike by April 2016 at earliest. Perhaps a smaller hike could be done by September, more like 10bps (which is fully priced in).
So about next week’s meeting. This two day meeting is followed up by a press conference by Ms Yellen, but more importantly will be the language in the statement and a revision of economic projections for the remainder of 2015 and beyond. If you recall, the March revisions downgraded the economy and inflation.
Recent job gains may offset other weakness but I suspect the Fed will start taking a more guarded approach, while raising the rhetoric to the belief in a better second half.
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