The Fed Keeps Its Options Open; Next NFP Report Key
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Against the backdrop of economic data surprising to the high side since the June meeting as well as financial markets taking the Brexit vote well, the Fed upgraded its assessments of the economy and the labor market in the July statement. The takeaway is that the Fed is clearly eying higher rates this year; December is our baseline but one should not rule out a September move at the current juncture the low market-implied probability notwithstanding.
While the Fed said that it continues to closely monitor global and financial developments (same as in June), it now suggests that risks have diminished which is a new and significant addition. When the Fed was on the brink of hiking rates last year, it suggested that the risks to the outlook were “nearly balanced” which is why the current language around risks is a hawkish signpost. As such, the Fed is keeping the door ajar to a September hike while not signaling so explicitly. The discussion around risks in the minutes three weeks from now will indeed be interesting to see. Moreover, the Jackson Hole event will also be interesting to watch since the Fed chair is one of the speakers.
After having voted as the majority in June, Esther George was dissenting again in favor of higher interest rates -- also hawkish at the margin. The dollar strengthened right when the statement was released, but gains were soon enough reversed thus suggesting that the statement was no game-changer. That said, financial conditions are extremely accommodative at the same time as the labor market is operating close to capacity so a strong wage number in the next employment report may well make that fabled September hike a live possibility.
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