Fed: Appropriate Behavior

Published on May 27, 2016

Key Takeaway:

•    Chair Yellen essentially confirms a rate move this summer, keeping her options open on whether to make the rate move in June or July.

Federal Reserve Chair Janet Yellen clearly set the stage as we expected to a summer rate hike in her brief reply to Harvard University’s professor Greg Mankiw’s humorously worded question about near term policy, that a Fed rate hike “in the coming months may be appropriate.”

*** Unless your dictionary defines “coming months” as long as four months, Yellen clearly intended in her prepared response to point the market to a rate hike at the June or July Federal Open Market Committee meeting, deliberately and deftly leaving the FOMC’s options open on either month. ***

The recent data, including upward revisions to the first quarter GDP and upbeat Nowcasts for the second quarter, should be further fueling the expectations for a rate move. The only remaining datapoint of worth is the May Non-Farm Payrolls at the end of next week. That number may dip due to the Verizon strike taking a chunk of workers out of the payrolls the week of the survey this month. But it will be treated as noise and discounted, especially amid the talk of a strike settlement by next week.

As we noted earlier this week (see SGH 5/25/16, “Fed: The Brexit Factor”), the decision on whether to raise rates in June or July rate will be a purely tactical one, depending on the Fed’s weighing of the Brexit probabilities, and whether it is prudently worth the wait to July, however low the probabilities may be of a British vote to exit from the European Union.

On balance, since the timing between June or July makes no difference to the policy normalization per se, we suspect the caution of the Chair and the FOMC majority may lean to July. But there are still several weeks to go, as the decision won’t be made until the June 14-15 meeting itself, and the grounds for a June move with the Summary of Economic Projections and the press conference will certainly be there on the table.

Much by then will depend on how confident the Committee is that they can keep the markets on the Fed’s messaging that a rate hike is indeed appropriate, whether in mid-June or the end of July.

In any case, the next real indication on the appropriate timing, if there is one, may come in Yellen’s June 6 speech, appropriately enough on D-Day, the anniversary of the Allied landings on Normandy.

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