Fed Speeches Key Following Hawkish Minutes

It seems the Federal Reserve’s hawkish message on interest rates is finally starting to sink in which is weighing on U.S. futures ahead of the open on Thursday.

For months, Fed officials have been suggesting that more rate hikes are likely this year but the warnings have fallen on deaf ears with markets instead repeatedly pushing back the date at which it believes the next rise will come. The situation was made worse for the Fed when it pared back its outlook for four rate hikes this year to two, bringing it more in line with the markets and creating a situation in which the markets appeared to be leading the Fed, rather than the other way around.

Since then the job of preparing investors for future hikes has been very difficult, with the markets simply brushing off any warnings and assuming the Fed will follow again. Well that all appears to be changing, with the Fed firming up its communication considerably in recent weeks and the FOMC minutes from the April meeting were very much in line with this new strategy, to the apparent disappointment of investors.

The Fed’s recent tactics are finally baring fruit with markets pricing in a much higher chance of a hike in June, up from 4% at the start of the week to 34% now. While this still means no hike is expected and it’s well below the threshold that the Fed will want to see come the meeting, if in fact it intends to hike, it represents significant progress for the Fed and puts June back on the table.

Fed Funds Futures

Source – CME Group FedWatch Tool

Given what we’ve seen over the last couple of days, today’s comments from Vice Chair Stanley Fischer and New York Fed President William Dudley will be very significant. Markets are likely to be very sensitive to references to the June meeting now, particularly when it comes to senior influential officials such as Fischer and Dudley. What would make support for a hike in June even more significant is the fact that Fischer is typically one of the more neutral policy makers and Dudley is firmly in the dovish camp. Hawkish tones from either of these would suggest there is consensus support for a hike and I think the markets would respond accordingly, with the implied odds of a hike surging once again. Moreover, we could even see the odds of a second hike before the end of the year being priced in, something investors were absolutely convinced would not happen even a week ago.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.