Until a few days ago, this meeting looked like a legitimate candidate for another rate hike. And if the Committee had decided to wait for the result of the Brexit referendum, the statement would at least have prepared a hike at the July meeting. All this has changed due to the disappointing employment report. Fed Chair Yellen in her latest speech dropped the line that another hike is likely appropriate “in the coming months” that she still used in late May. And while she reiterated her baseline outlook that “further gradual increases in the federal funds rate are likely to be appropriate”, she talked at length about all the uncertainties surrounding her baseline outlook. The bottom line is that the Fed is back in a wait-and-see mode. It is now waiting again for economic and data to corroborate the view that the economy is strong enough to withstand another 25bp hike. We think that a July move is still very possible – but the Fed is not going to signal anything in the press release or during Chair Yellen’s press conference.
In conjunction with the statement, the Fed will release an update of its Summary of Economic Projections. With the latest data releases, Fed officials will most likely lower their median 2016 GDP growth forecast from 2.2% to around 2.0%, and cut their unemployment rate projection for year-end 2016 from 4.7% to 4.5% or so. The growth and forecast for the coming two years should remain roughly unchanged, at around 2% (for GDP growth and ).
The FOMC members’ interest rate projections will most likely come down further. While we think that the median “dot” for year-end 2016 will continue to show two hikes for this year (same as in March), the number of projected rate hikes for 2017 and 2018 will probably be lowered to three per year from four. That would bring the FOMC median in line with our own projections. In addition, we wouldn’t be surprised to see the estimate for the longer run natural rate lowered again to 3% from 3.25%.
We opened long EURUSD in short-term part of our portfolio at 1.1225. Brexit polls would be the main risk to our short-term view. Our long-term EURUSD outlook remains .
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