There is still an expectation for a U.S. interest rate hike this year, possibly as early as September.
The global economics rates and foreign exchange team at Bank of America Merrill Lynch is predicting a “September liftoff,” based on the June minutes for the Federal Open Market Committee. “Our take-away from the minutes is that September remains a viable option should the recent trend in the data continue,” the BofA team noted in a research note.
While the June minutes showed that some committee members raised a few reasons for concern, such as the economic issues in Greece and China, the focus on the Fed’s outlook for policy was centered on the labor market. That’s the area where many committee members thought significant progress has been made, even as a few considered that further improvement might still be possible.
Following the release of the FOMC minutes, rates declined slightly. The Overnight Index Swap market is priced in for a 20 percent chance of a rate hike in September, with a more likely possibility that a hike will come in December. The BofA team believes that “turbulence in Greece and China has depressed short-term U.S. rates, but we expect rates to rise given that U.S. data have come in stronger in recent weeks, supporting our base case for a September liftoff.”
At Moody’s Analytics, a rate hike in September isn’t guaranteed, but one in December could be more likely.
John Lonski, an economist at Moody’s Analytics, isn’t so sure about a rate hike in September. He noted the prospective 17 percent plunge by Moody’s industrial metals price index for the three months ended July 2015, and pointed out that one can discount the likelihood of a rate hike whenever the base metals price index drops by at least 15 percent annually. “At least since 1984, the Fed has yet to hike rates amid so deep of a decline by industrial metals prices,” he concluded.
Ryan Sweet, a director at Moody’s Analytics, noted that the June FOMC minutes didn’t provide much guidance on the Federal Reserve’s interest rate or balance sheet policies. He said while there was discussion of the risks associated with waiting too long to begin normalizing interest rates, the June minutes are at this point in time “somewhat dated, as the U.S. economic data have improved since the meeting, while the situations in Greece and China have deteriorated.” The changes in the global economic backdrop since the June meeting likely don’t reflect policymakers’ current assessment of the economic landscape, he reasoned.
That said, there stands a chance that a rate hike could come this year.
Sweet also noted San Francisco Fed President John Williams’ view that the Fed can raise the target range for the fed funds rate this year, as well as the Fed president’s conclusion that Greece is not expected to be a serious problem for the global economy.