Fed Brief

Jul 29 2016 - Toss Up

The latest policy directive from the Federal Open Market Committee (FOMC) was released and it made one thing very clear: the FOMC may raise the fed funds rate at its next meeting or it may not.

Got that?

It's a snarky summation of a directive that seems driven more so these days by the direction of the equity market than the direction of the data.

Nevertheless, the FOMC is steadfast in its reminder that the path of monetary policy will be shaped by incoming economic data.

It offered a nod in the directive to that rooting principle when it reiterated that, "In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation."

The signature line of this policy directive, though, was the following: "Near-term risks to the economic outlook have diminished."

That line connotes a view that committee members are no longer hung up on the weak nonfarm payrolls report for May (which was squashed by the strong payrolls report for June) or the Brexit vote (which has been subsequently greeted by new record highs for the stock market).

Another nod to the rate-hike door being left open was the dissent by Kansas City Fed President George.

Ms. George preferred at this meeting to raise the target range for the fed funds rate to to percent. At the June meeting, she backed off her hawkish position and voted in unanimity with other members to hold the policy rate unchanged.

Now that Ms. George is back in favor of raising rates, we will assume that some of her colleagues are now going to squawk in coming weeks about the prospect of there being at least one more rate hike before the end of the year if recent economic trends persist and that the September 20-21 FOMC meeting is a "live" meeting for just such a hike.

It's a road show the market has seen before, only this market has never bought into the initial public offering of a rate hike being instituted against the market's prevailing belief.

Right now the fed funds futures market is pricing in only a 24% probability of a rate hike in September, which goes to show there isn't a whole lot of conviction behind the thought that the Fed will raise rates in September ahead of the presidential election.

Separately, the fed funds futures market shows only a 50.5% probability of a rate hike at the December meeting, which effectively means it thinks a rate hike before year end is pretty much a toss up.

These expectations will assuredly change in coming weeks as more data are released and financial markets react accordingly.

For the time being, it can be said that the FOMC stands ready to raise the fed funds rate, but that another rate hike may or may not happen in September.

--Patrick J. O'Hare, Briefing.com

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