Brexit has been the key focus for investors in recent weeks and it’s going to remain so for at least one more. Today, however, focus will shift to the US with the latest Fed decision, press conference, forecasts and dot plot due, along with a number of key pieces of economic data.
The decision itself looks like it’s going to be rather straight forward. The Fed has made it clear over the last month or so that it would like to raise interest rates again soon and again before the end of the year, as long as the data continues to perform in line with expectations, but the spanner in the works this month was always going to be the referendum in the UK. Had the polls and betting odds shown the remain campaign clearly ahead prior to today’s meeting, I think the Fed would have proceeded with a rate hike this month. As it is, the polls are very close, if not leaning towards leaving, and the betting odds are getting closer by the day. The Fed would be therefore taking an unnecessary risk if it were to raise rates today, adding fuel to what would already be quite a vicious fire if the UK voted to leave the EU next week.
Last month’s job report proved to be a get out of jail free card for the Fed as it can now point to that as being the reason for holding off, not events elsewhere. The rest of the data, particularly consumer spending figures, has been very good as of late and could easily have justified a rate hike this month. As it is, the Fed is now likely to hold off today and possibly hike at the next meeting, assuming of course that the UK remains in the EU, data continues to perform well and markets don’t fall apart in that time.
With all this mind, investors today will be focused on Janet Yellen’s press conference and the economic projections and dot plot that will accompany it. Yellen is likely to deliver the usual performance, talking up the progress in the economy, warning about potential risks to the outlook and driving home the point that any future decisions are data dependent. The economic projections will give us a better idea of how the Fed sees the economy performing and whether the performance in the second quarter has made them more optimistic – and therefore potentially hawkish – or less optimistic – and therefore potentially less hawkish.
Already once this year, the Fed has conformed to the markets view of how many rate hikes there will be – falling from four in December to two earlier this year – and today will tell us whether they are doing so once again, or standing by their call for two hikes before the year is out. I think they will stand by their previous calls for two hikes, which the market will more than likely ignore, but if they do conform and drop their expectations to one, we could see a hike this year all but priced out. The markets have a hard time accepting the Fed’s views on interest rates at the best of times and if they’re seen backing down again today, investors will take it as a sign that they have no confidence in the economy and push back their expectations even further. What could bring markets more in line with the Fed is if the dot plot shows a strong show of support for a July hike.
For a look at all of today’s economic events, check out our economic calendar.