April Fed Meeting Tone To Set Markets Up For June Decision

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Fed Meeting – The U.S. Federal Reserve is set to meet next week, and that meeting should give investors a hint about what to expect in June. Some expect regulators to raise interest rates again over the summer, but their number may be few as signs suggest that this opinion is fairly unpopular. Jefferies economists say the markets are pricing in only a 14% chance of a rate hike in June.

Needless to say, investors and economists are anxiously waiting to see what they have to say at the April meeting.

Looking for a lead at the April Fed meeting

Jefferies economists Ward McCarthy, Ph.D. and Thomas Simons believe investors generally aren’t expecting a rate hike at the June Fed meeting, and it’s no secret that economists and investors alike are split on how many hikes to expect this year. Surveys suggest that the number of market watchers who expect two hikes this year is growing, while the number of those looking for just one hike is shrinking. The Jefferies team said expectations declined as January and February went on, then climbed early last month on the back of improving economic data.

Recent Fed comments pointed to the growing importance of “international developments” as regulators begin to realize that the U.S. central bank is effectively a global central bank because anything they do sends broad ripples throughout the global economy. This is one of the reasons expectations for rate hikes this year have come down. The Jefferies team sees June’s Brexit vote in the U.K. and the presidential election in the U.S. could cause the Fed to pause but doubts that they will have a serious impact on the outlook for policy.

Markets turn more skeptical

McCarthy and Simons said previously that the front-end markets moved from “skepticism” to “realism,” but ahead of the April Fed meeting, they believe the markets have moved “firmly back to ‘skepticism’ and ‘pessimism.'” They still believe the next rate hike will come at the June meeting, but they expect to hear clues that this will happen at the April Fed meeting. They expect comments that will be similar to comments made at the October Fed meeting when regulators set out what they’re looking for before they will raise rates again, and they don’t expect the next rate hike until the December meeting.

“If the Fed does not set up a June rate hike in the April statement, it is hard to foresee a rate hike in June given the market’s positioning,” they added in the April edition of their Front-End Chartbook titled “Mid-March Fed Optimism Fades Away.” “Although the Fed will be opportunistic about a rate hike, they will not want to surprise the market.”

The Jefferies team notes that inflation readings are speeding up toward the 2% and employment numbers keep improving. They don’t believe the Fed can afford to wait until December to raise rates again because regulators run the risk of losing credibility and already the markets seem to see them as “substantially behind the curve.”

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