Fed Watch – Probability Of June Rate Hike Abates


At a live press conference today at The World Affairs Council of Philadelphia, FOMC Chair Janet Yellen provided her thoughts on US monetary policy and the path of interest rates.

In summary, Yellen remains cautiously optimistic and believes that the FOMC’s current stance of monetary policy is stimulative and appropriate to the US economy. It is reasonable to believe that up until last Friday’s subpar employment report of a +38k creation of jobs in the month of May, a June rate hike was highly probable. We remind readers that the monthly employment data is a volatile statistic and is not the only data point the FOMC considers. For example, in 2006, during a time of economic growth, an average +216k jobs were created from January to May, comparably, in 2007 an average of +148k jobs were created. Year to date, we are averaging +150k jobs growth. Though we have not counted out a June rate hike, a dovish FOMC will likely stay on the sidelines unless additional positive economic data surfaces over the next several days.

We highlight the economic strengths and weaknesses as well as continuing headwinds in consideration for the near term rate hike decisions:

Economy added 2.7mm jobs last year (avg 230k/month)Q1 2016 jobs growth less than 200k Will Britain choose to exit the European Union
Unemployment rate fallen from a peak of 10% in 2009 to 4.7% in May 2016Net exports are still a drag (partly due to USD strength)US productivity growth
BLS’ job openings rate was at a record high in MarchLow oil prices, though overall positive on US economy, is negative for employment in the energy sector. US GDP growth
Quits rate, employees who voluntarily leave their job, has increased and is near pre-recession levels signaling confidenceApplicants with low credit scores or difficult to document income is still facing difficulty in obtaining creditEmployee Wage growth
Wage growth is beginning to show signs of growth; +2.5% over the past yearOil prices
New unemployment insurance claims remain lowInflation 2% goals
Higher household incomesPCE only rose 1% since April YoY
Strengthening consumer confidenceUSD strength causing net exports to decline
Rising equity and home prices (+ wealth effect)Capital outflows in the emerging markets, notably China
Low oil prices have contributed household purchasing power by some estimates of around $1.3k
Home sales and new construction is improving
Housing has been buoyed by low mortgage interest rates