Fra BNP Paribas:
The April FOMC minutes were surprisingly hawkish. We learned a lot about the Fed’s reaction function. If a wave of opportunity to hike comes along it appears they are inclined to ride it. Worryingly, one good retail sales figure seems to mean more than two quarters of growth averaging 1%.
In the light of this, we think odds of a June hike are higher than the 30% the market is currently pricing. Prior to the release, Bloomberg was reporting 14% odds; following the minutes, 30% odds. We continue to think that a rate hike this year is unlikely given the unimpressive domestic economic outlook and asymmetry of risks, however the minutes indicate a willingness on the part of FOMC to re-engage. In our forecast we have the FOMC on hold throughout 2016 and 2017.
If they were to hike in June, the odds of a further move this year would likely reduce rather than increase in our view – because we agree with “some participants… that a more persistent slowdown in economic growth might be under way”. Moreover, we think there would be consequences in global financial markets, just like we saw earlier this year.
The most hawkish part of the minutes was that “most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.’ We know from now-casts that Q2 does already look better than Q1.
