Timing The Next Hike Post-FOMC Minutes - Views From 7 Major Banks

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Credit Agricole: FOMC voters want to keep their options open for raising rates in June. They seek to “maintain the flexibility to make this decision based on how the incoming data and developments shaped their outlook for the labor market and inflation as well as their evolving assessments of the balance of risks around that outlook.” Fed officials generally saw the Q1 growth slowdown as temporary and noted that labor market conditions continued to strengthen while inflation continued to run below the 2% objective. ”

We continue to look for two Fed rate hikes this year as we believe economic growth is poised to rebound to an above-potential rate in Q2, placing additional downward pressure on the unemployment rate. We believe the most likely timing for the next rate hike is July in order to fully assess the incoming Q2 data as well as provide ample time to communicate policymaker thinking to financial markets.

Credit Suisse: The minutes of the April 26-27 FOMC meeting supported a growing realization in the market that the Fed may hike rates in 2016 after all. Some Fed officials apparently were motivated to remind market participants that the Fed intends to continue normalizing policy with gradual rate hikes, with the next move coming before year-end. Since the April meeting, the US economic data have provided preliminary evidence that growth is bouncing back in Q2 from a weaker-than-anticipated Q1.

All in all, we maintain our expectation that the Fed will hike rates twice this year, with the first move coming in September.While an earlier hike is possible, it would take large positive data surprises in the coming weeks for the FOMC to be confident about moving as early as June, in our view.

BNPP: The April FOMC minutes were surprisingly hawkish. We learned a lot about the Fed’s reaction function. If a wave of opportunity to hike comes along it appears they are inclined to ride it. Worryingly, one good retail sales figure seems to mean more than two quarters of growth averaging 1%. 
In the light of this, we think odds of a June hike are higher than the 30% the market is currently pricing. Prior to the release, Bloomberg was reporting 14% odds; following the minutes, 30% odds. We continue to think that a rate hike this year is unlikely given the unimpressive domestic economic outlook and asymmetry of risks, however the minutes indicate a willingness on the part of FOMC to re-engage. 

In our forecast we have the FOMC on hold throughout 2016 and 2017. If they were to hike in June, the odds of a further move this year would likely reduce rather than increase in our view – because we agree with “some participants… that a more persistent slowdown in economic growth might be under way”. Moreover, we think there would be consequences in global financial markets, just like we saw earlier this year.

BofA Merrill: The April minutes of the Federal Open Market Committee (FOMC) revealed a greater willingness to consider a June rate hike than market pricing or recent consensus among economists would suggest. Indeed, “some” voting members thought that market pricing of a June rate hike “might be unduly low.” While “most” participants thought that a case for hiking in June could be made if their forecasts for improving 2Q growth, continued labor market strength, and progress on inflation were met, “several” worried that “incoming information might not provide sufficiently clear signals” in time.

The FOMC otherwise was divided on several issues, and the voters generally agreed that it would be “appropriate to leave their policy options open” and “maintain flexibility.” As we have noted before, rate hikes this summer remain a possibility, conditional on the outlook. However, our base case remains a patient Fed that next hikes in September.

Danske: The minutes from the FOMC meeting held in April revealed that the FOMC is more divided than we previously thought. In general, the FOMC members agreed that the labour market continues to strengthen, weak GDP growth in Q1 was likely a transitory dip and financial conditions have eased. But the agreement ended there.

Our main scenario is still that the Fed will wait with hiking until the FOMC meeting in September and only hike once this year among other things due to our judgement that most voting FOMC members are dovish. By waiting until September the Fed has more time to judge incoming data and we will also be past the UK’S EU referendum. With respect to the latter the minutes state that ‘some participants noted’ that markets are sensitive to the upcoming referendum. That being said, the probability of a hike in either June or July has definitely increased on the back of the FOMC minutes and the door for June was never completely shut although we thought so – even despite the somewhat weak employment growth in April (the data were released after the FOMC meeting). 

Barclays: The minutes of the FOMC’s April 26-27 meeting adopted a modestly hawkish tone.  The committee seems generally comfortable with the near-term economic outlook, and most participants judged that, if incoming data continue to perform well, it would “likely” be appropriate to increase raise rates at the June meeting. With April activity indicators consistent with a healthy bounce-back in growth, we see risks of two rate hikes in 2016, with the first coming in the June/July time horizon. We view Chair Yellen’s June 6 speech as likely determining the near-term path of policy. When we last heard from her at the end of March, we judged her statements as consistent with at most one rate hike this year. However, most committee members now seem comfortable with two rate hikes, if not three, this year. The chair may be influenced by their views (or the ongoing resilience of the economy), or she could maintain her cautious outlook.

For the committee to raise rates as early as this summer, Chair Yellen will have to adopt a substantially more hawkish tone than she did in March, and she will need to clearly lay out expectations for the path of policy. We maintain our forecast for one hike in 2016 and three in 2017 as we look ahead to Chair Yellen’s June 6 appearance.

SEB: It was our take that the FOMC decision at the April meeting was hawkish since the Fed evidently kept the door ajar to rate hikes in upcoming meetings. For one thing, the Fed did not seem overly worried about the weak growth in the first quarter; while growth was downgraded from “moderate” to “has slowed” the very first line set the tone and instead of focusing on the weak growth the Fed said that the labour market has improved further. Indeed, the minutes today gave a hawkish impression too with most Fed officials seeing a June hike likely if the economy so warranted. This time, markets got the message.

Against the backdrop of most officials eying June, it is not surprising at all that recent comments have suggested that Fed officials were uncomfortable with markets basically pricing the Fed out. But more recently the combination of hawkish speeches and better economic news have pushed markets into pricing in a higher probability of Fed hikes, yesterday the probability of a June hike was just 4% compared to 30% today (was 14% before this release). While a September hike still is the baseline, the minutes are clearly suggesting that risks are skewed towards an earlier date. If so, the odds may favor the July 27th meeting given that the BREXIT referendum is just a week after the June meeting.

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