While various Federal Reserve regional presidents continue to bang the “June drum” regarding the next increase in interest rates, most analysts and traders have proclaimed the June rate hike dead.
So, who is right, Washington or Wall Street?
A horrible non-farm payrolls report last Friday had NY Federal Reserve president William Dudley hit the press circuit running. His claim that two interest rate hikes were still firmly on the table helped pull the dollar out of the red, but the wider markets aren’t buying it. Not only have most of the banks written off a June rate hike, they’ve abandoned thoughts of a July rate hike as well. September now seems to be the favored date for the first rate hike of 2016, which coincides with our opinion (more on that later.)
Goldman Sachs in particular, which was on the June rate hike bandwagon, got sandbagged by Friday’s payroll report. Goldman analysts had expected 240,000 new jobs, when there was only 160,000. Barclays took it one step further. They not only believe that September is the earliest that the Fed can raise rates, they say that it will be the only rate hike this year. Bank of America is on the same page, also predicting a “September one and done.”
Ellen Zentner, chief US economist at Morgan Stanley, is even more pessimistic. She not only calls for just one rate hike by the Fed, but says it will not happen until December. The CME FedWatch tool, which uses 30-day Fed Funds futures rates, have the chance of a June rate hike at a measly 8%. (The FedWatch forecasts change constantly, along with Fed Fund rates.)
One And Done? Which “One”?
Our personal opinion is that September is the earliest that the Fed could hike interest rates. The only other month would be December. Unlike most prognosticators, we have no opinion whether there will be one or two rate hikes.
Let’s run down the pros and cons of the dates of the remaining FOMC meetings.
- June 14-15: This is just 8 days before the June 23 “Brexit” referendum in the UK. A vote to leave the European Union could drop the entire planet into economic turmoil. A Brexit vote may even force Fed to cut rates back to zero. If so, kiss 2016 goodbye. The first quarter of 2017 would probably have the odds stacked against it as well.While most polls show that the “Remain” side will win, these are the same pollsters who were totally off last election, predicting the Tories would lose. FedWatch odds: 8%.
- July 26-27: One strike against a July rate hike is that there is no press conference by Fed head Janet Yellen afterward. This meeting occurs right in the middle of the Democratic Party presidential convention. The GOP convention will be the week before. The dangers of political fallout is too great to ignore, as it would be seen as a blatantly political move. It would probably add considerable support to efforts to bring the Fed under Congressional control.Another factor that may manifest itself is the June 20 deadline for Greece to repay €2.9 billion in loans. FedWatch odds: 21%
- September 20-21: This FOMC meeting is seen by many as the first real chance the Fed has of increasing interest rates. This is our pick as well. Yellen is scheduled to hold a press conference afterward – another item in its favor. Some see it as too close to the November 8 Presidential election. A rate hike here could unleash the fury of accusations of political bias, and calls to dismantle the Fed. FedWatch odds: 30%
- November 1-2: Five days before the Presidential election? Are you kidding me? FedWatch odds: 35%
- December 13-14: Hey, how about another Christmas rate hike? If the Fed didn’t pull the trigger in September, this is the last chance for a 2016 rate hike. While no one believes the Fed’s noise about raising rates three times this year, a September hike plus a December one would put two in the books. Another plus: Yellen is scheduled to speak. FedWatch odds: 50%
Most market watchers are in the “September one and done” camp. Others are on the “December and done” side, while still others say February 2017 at the soonest (FedWatch odds: 53%.) Hopefully, we’ve explained the pros and cons for each FOMC meeting this year, so you are better informed.
Remember, however, that sudden events, such as a commodities collapse in China, could throw everything out the window.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product