Fed Call: Odds favor September hike but don’t rule out July/December - RBS

Research Team at RBS, notes that several FOMC participants (including those who typically align with Yellen) continue to signal that two rate hikes are likely to be appropriate this year.

Key Quotes

“While we do not rule out such a scenario, we think the odds favor no action until September and just one hike this year. Given the concern/uncertainty surrounding the Brexit vote on June 23, we believe US policymakers will be disinclined to surprise the market with action in June. Though we do not rule out the possibility of a hike in July if the UK votes to remain in the EU, the Fed is more likely, in our view, to use the summer to assess domestic and global developments and set the stage for action in September. We do not believe Fed Chair Yellen is in a hurry to act.

To the contrary, Yellen and the FOMC leadership have signaled a renewed risk management approach to policy (i.e. the risks of moving too quickly are greater than the risks of moving too slowly). Thus, we think the Fed will wait until September to act and, in that event, hike just once in 2016 (since moving again in December would represent an accelerated pace of normalization that Yellen is unlikely to think necessary).

We expect the funds rate to finish 2016 in the 0.50%-0.75% range. In 2017, when we believe both FOMC mandates may be breached, the pace of tightening could accelerate to a still-historicallygradual clip of one hike per quarter, raising the funds rate to the 1.50%-1.75% range by year-end.”