Fed: Next Stop, NFP

Published on April 27, 2016

The Federal Open Market Committee decisively left the door open for a June rate hike in this afternoon’s April meeting statement by deleting altogether the March reference to continuing global risks.

*** If the data do indeed cooperate by staying in line with the central tendency forecasts, we think it is likely to set the stage for increasingly clear signals from Fed officials and probably Fed Chair Janet Yellen herself that a June rate hike is rising in its probabilities, as we have written previously (SGH 4/22/16, “Fed: April Messaging” and SGH 4/27/16, “Fed: April Bridge”). ***

The immediate market reaction was muted, with the June probabilities briefly rising from 20% to 25% before slipping back to unchanged. The Fed, we would suspect, is perfectly comfortable with  that, for now, but it will be fully expecting those odds to steadily rise through May, assuming of course the upcoming data unfold in line with projections.

The Nonfarm Payroll breakdown, and in particular whether the labor participation rate continues to edge up even if the headline jobs number finally starts to ebb, is going to entail an out-sized importance in shaping the Fed policy messaging in the first half of May. But for now, the Fed has positioned itself for maximum policy flexibility to react to the data and to nudge the market towards June accordingly.

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