Fed to hike rates, raising target range for the federal funds rate to 1.00-1.25% - Rabobank

Philip Marey, Senior US Strategist at Rabobank, expects the Fed to hike today, raising the target range for the federal funds rate to 1.00-1.25% but still thinks that the third hike in the Fed’s plans for this year will not materialize.

Key Quotes

“The FOMC will meet on June 13 and 14. This meeting will include an update of the economic projections and a press conference by Chair Janet Yellen. Since FOMC speakers did not push back against market expectations of a June rate hike before the start of the Committee’s blackout period, it would take an extreme adverse event to avert a hike on Wednesday. This would raise the target range for the federal funds rate to 1.00-1.25% from 0.75-1.00%. While employment growth is not exuberant, it is sufficient to absorb the inflow to the labor market. Moreover, the near standstill in March (only 50K) seems to have been temporary, followed by average growth of 156K in April and May.”

“Finally, unemployment fell to 4.3%, well below the FOMC’s estimate of the longer run unemployment rate of 4.7%. This means that the labor market data are likely to be sufficient for the Fed to hike for the second time this year. What’s more, other data suggest that the economy is doing well in Q2 with the Atlanta Fed’s nowcast at 3.4% (as of June 2) after the modest – albeit plagued by residual seasonality – Q1 GDP growth rate of 1.2%. Note that the minutes of the previous meeting in May indicated that members generally judged that it would be prudent to await additional evidence indicating that the recent slowdown in the pace of economic activity had been transitory before taking another step in removing accommodation.”

“However, the combination of unemployment at 4.3% (well below the Fed’s 4.7% estimate of the NAIRU) and average hourly earnings growth of only 2.5% year-on-year (well below the Fed’s preferred 3-4%) suggests that the FOMC will have to make another downward adjustment to its estimate of the NAIRU.”

“The FOMC may also make a downward revision to its PCE inflation projections which in March suggested 1.9% for both the headline and core measure in the final quarter of this year.”

“In addition to the inflation outlook we continue to see a series of downside risks to the US economy that each by itself could make the Fed stop in its tracks.”