Waiting for the Fed: more rate hikes unlikely after June as elections get closer

Financial markets are currently discounting a 51% probability of a rate hike in June. But what after that? US central bankers look much more cautious than they were at the beginning of the year. 

In the fortnight of the Central banks, after the European Central Bank (ECB) and the Bank of Japan (BoJ) meetings, markets are now focusing on the next major date. On Wednesday 16th March, hence tomorrow, the Federal Open Market Committee will held interest rates confined in the 0.25%-0.5% range. The very same range to which they were promoted three months ago. So what the fuss is all about? 

“Investors will be looking for signs that Fed officials are worried enough about the recent global slowdown to have raised down their ‘dot plot’ predictions of the future path of interest rates rises, which at the beginning of the year raised the prospect of at least four rate rises this year” explains Michael Hewson, chief market analyst at CMC Markets UK. Surely something has changed since the beginning of the year if also the most hawkish member of the Fomc, the St Louis chief James Bullard expressed concern “that a further rise in rates would be ‘unwise’ while inflation and wages pressure remain weak”.

Not to mention a Mr Stanley Fischer, Deputy Fed Chairman, stating at the beginning of the year that the prospect of four US rate rise in 2016 was “pretty much in the ballpark”. He too has come to more reasonable terms now. “The latest February average hourly earnings numbers – resumes Hewson – would have been a blow to the hawkish case even without the recent market turmoil, coming in as they did at -0.1%, a sharp drop from the 0.5% gain seen in January”.

 The market is currently implying a 66% probability of a rate rise in September meeting and a 51% one in June. Broadly speaking a couple of rate hikes in 2016 are is on the map but “it is highly unlikely that the Fed would feel confident enough to move on rates after June”. And this time the reason is domestic. “While Ms Yellens’ press conference will be important in the context of whether the Fed has any significant concerns about a continued overspill from China and the rest of the world – concludes Hewson – it is hard to escape the possibility that the circus surrounding this year’s US election vote won’t affect confidence in the US economy, and this more than anything could prompt the Federal Reserve to take back seat lest they be accused of trying to influence the outcome”.  

Source: Michael Hewson, Chief Market Analyst at CMC Markets UK