FOMC: UK referendum clouds the outlook for the Federal Reserve - Scotiabank

Derek Holt, Research Analyst at Scotiabank, suggests that the UK referendum clouds the outlook for the Federal Reserve and will keep it on hold for now, but it is hardly the only reason for expecting little firm guidance from the FOMC this Wednesday.

Key Quotes

“The meeting has become somewhat anticlimactic in the wake of the nonfarm payrolls reports for April and May that showed a marked deterioration in the pace of job growth to 123,000 in April and 38,000 in May for the weakest two month average in over five years. It’s prudent to be cautious regarding the risk that a souring job market trend has unfolded; it would be inappropriate to overreact.

Indeed, most labour market readings are resilient including jobless claims, JOLTS vacancies and wage growth. But until the issue of trend job growth has been settled — and it might take a couple of months of payrolls data or more to do so — it is unlikely that the Fed will be comfortable with raising rates. That rules out a hike next week, puts low odds on a July hike, and puts our September call at a lower probability while remaining our base case.

A key risk to nevertheless watch will be whether median FOMC rate guidance continues to project two hikes over the remainder of the year and four hikes next year or inserts greater caution to a track record on Fed rate guidance that has been nothing short of abysmal over the years. Recall that in her recent remarks just before going into communications blackout, Chair Yellen did not repeat her comment that was made just days earlier about a rate hike being possible over ‘coming months’.”