September Fed rate hike on the table post FOMC?

28 July, AtoZForexAfter the two-day meeting, the Fed has kept interest rate unchanged at a target range of 0.25 to 0.5% and reiterated a slow pace of tightening. With US economy showing signs of improvement and near term risks fading, Barclays expects September Fed rate hike. But should we?

September Fed rate hike expectations

“We view the FOMC statement as somewhat more hawkish than we had expected,” Barclays noted.

The tone of the FOMC statement reaffirms that the Committee is likely to hike its policy rate at the September meeting, notes Barclays, as long as the labor market continues to perform. Although the Committee remains concerned about inflation expectations and the global economic environment, these concerns are not stronger than they were in the December meeting, when the Fed first hiked the rates.

Barclays expects even firmer signals of September Fed rate hike from Chair Janet Yellen during her speech at Jackson Hole on August 26. By then, the committee will have Q2 GDP data, July employment, and see market reaction to anticipated easing by the BoJ and BoE.

With such data in hand, “she will likely feel even more comfortable with the underlying state of the economy and the likelihood of a September rate hike,” Barclays added.

Or is September Fed rate hike just another guess?

The July FOMC statement sounded more upbeat than in June for Bank of America Merrill Lynch as well, but it was not a game-changer.

The Fed noted that near term risks to the economic outlook have diminished, meaning the Committee is acknowledging the post Brexit calm in the markets, but is still worried about the uncertainties in the global economic outlook.

“This is setting the stage for another hike while making it clear that it is not imminent,” BoAML noted , adding “we continue to believe that a September hike is unlikely, but expect conditions to be met by December to justify a rate hike, assuming no additional negative shocks.”

The FOMC made no significant changes to inflation expectations, claiming that “most survey based measures…are little changed, on balance, in recent months.” Though trending in the lower end of the range.

Given the uncertainty about the degree of slack in the job market and the trend of wage growth, “it seems that Fed officials are still more concerned about downside than upside risks to inflation,” BoAML added.

Therefore, if we were to put the Federal Reserve in markets terms, the Fed remains in consolidation and “the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data,” July FOMC statement wrote.

Also see: July FOMC Statement highlights: USD rises and falls

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