U. S. FED RATE HIKE TIMING REMAINS UNCERTAIN

Minutes from the U. S. Federal Open Market Committee’s most recent meeting further support expectations for a rate hike in June, as the market is pricing in very high odds for such a move. But as is often the case, the language used by the Fed got a lot of attention.

The minutes stated that “members generally judged that it would be prudent to await additional evidence indicating that the recent slowing in the pace of economic activity had been transitory before taking another step in removing accommodation.” They also reflect a meeting that occurred on May 3, which was followed by a very strong U.S. payroll report on May 5 that saw unemployment fall to 4.4 per cent.

“So it looks like the Fed got ‘ additional evidence’ even quicker that they perhaps expected,” said Tom Porcelli at RBC.

Porcelli continues to forecast two more rate hikes in 2017 ( June and December), with the Fed skipping a move in September to announce the framework for allowing maturing securities to run off its balance sheet.

It appears the Fed is getting closer to starting to unwind some of the quantitative easing ( QE) put in place during the financial crisis and its aftermath. The minutes revealed that nearly all members favour a cap approach, whereby the Fed sets a dollar- amount ceiling for what they will allow to run off each month, and raises that cap every three months.

Porcelli noted that this makes tapering officially the Fed consensus.

“With the potential for a ‘ tantrum’ based on the rollout of balance sheet run-off now greatly diminished, it makes it easier for the Fed to go more than two more times this year should they decide to do so,” Porcelli said.

While a June hike looks likely, Kevin Logan at HSBC thinks the timing of the next increase after that is becoming less certain.

“If the committee decides to get an earlier start to disinvesting some securities it acquired during the various QE programs, then the next rate hike might be postponed until sometime after the unwind begins,” Logan said.

James Marple at TD Bank said “Ongoing weakness in price growth would support those on the FOMC who see the unemployment rate as either under-reporting the level of economic slack or as not having the explanatory power in predicting inflation that it once did.”

He highlighted another potential fly in the ointment: the Fed’s desire to also begin normalizing its balance sheet. “The Fed’s hope is that if telegraphed clearly and far enough in advance, and if done in a gradual and predictable manner, balance sheet normalization will have minimal deleterious effect.”