Fed Preview: 5 Things To Watch Out For In A “Dovish Hike”

The Fed is trapped in its own setting of expectations. They are almost certainly going to raise the interest rate once again, the third time in six months. Recent data does not really justify further tightening, so Yellen and co. could counter the hike with a dovish tone. How can they do it without losing their credibility?

Here is a preview for the important rate decision on June 14th at 18:00 GMT. The press conference is at 18:30.

1 – Are they really raising rates?

We argued against the Fed raising rates, especially after the poor Non-Farm Payrolls. If the Fed is truly data-dependent, they cannot ignore the slowdown.

The Fed has two mandates: employment and inflation. Job gains are slowing down with 138K in the latest report. In theory, that could be a sign of the economy nearing full employment. It is just harder to hire. However, wage growth is stuck at 2.5%, and that is an ominous sign. There still is a lot slack.

In addition, inflation is not going anywhere fast. The Fed’s favourite measure dropped from a peak of 1.8% to 1.5% in April. The 2% goal looks elusive. Core inflation is also sliding: 1.9% in the latest report.

Maybe growth has yet to translate into inflation? Not really. The US economy grew by only 1.2% annualised in Q1 2017. In 2016 it grew by 1.6%.

So, we and also others doubt the hike is justified, but the Fed guided us to believe they will raise rates. Bond markets point to a 99% chance of a hike. Markets don’t like surprises and the Fed doesn’t like to surprise markets.

So, a hike is fully priced in. If we don’t get a hike, it will be a total shock and the USD will crash.

But let’s assume a hike is coming

2 – Dot plot – dovishness in here?

The Fed could respond to the gloomier reality with a downgrade of the path for future rate hikes. It could raise rates now but tell us that it will pause from now on.

Current projections show three hikes in 2017. Assuming the June hike, this means one more hike left. They could remove the projection for further hikes this year to acknowledge reality. This will send the dollar down.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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