Research Team at RBS, suggests that until they see Friday’s employment report and hear from Fed Chair Yellen on June 6, RBS will refrain from changing their formal Fed call for the next rate hike to be in September.

Key Quotes

“However, we believe the odds of action in July are as high as September (in fact, the combined odds of action in June and July are higher than September). In her appearance at Harvard University last Friday, Yellen was asked about the path of monetary policy going forward. In response, Yellen said, "It's appropriate…I think for the Fed to gradually and cautiously increase our overnight interest rate over time and probably in the coming months, such a move would be appropriate." Thus, it appears that the Fed Chair herself is on board for a rate increase in either June or July, assuming the data unfold as expected (which appears to be the case, as most second quarter GDP forecasts now appear to be above the 3% mark).

Assuming the Fed was to move this summer, we continue to think the odds favor July over June. While many question the import of the UK vote on the Fed’s policy decision, a number of Fed officials have indicated that the vote is indeed on their radar screen (just last Friday, Fed Governor Powell said, “I can imagine the upcoming Brexit vote as presenting a factor in favor of caution about raising rates in the U.S.”). While betting markets continue to price a higher implied chance that the UK votes to remain in the European Union, with a month of campaigning still to go and polling data suggesting that a sizeable proportion of voters are either undecided or have low conviction views, the outcome is far from certain.

Even if Brexit were seen to be an unlikely outcome, we think this extremely cautious Fed Chair might see relatively little cost to waiting another seven weeks to act. Importantly, we do not believe the lack of a post-meeting press conference in July is an issue. After all, policymakers have stressed that “every meeting is live” – and a July rate hike has the advantage of driving that point home. Plus, policymakers have numerous opportunities to set the stage and/or explain a July move ahead of time -- via the June “dot plot,” the June FOMC statement or the post-meeting press conference, and the Chair’s semi-annual testimony before Congress – so that, by the July meeting, a rate hike is so widely anticipated that it is essentially a nonevent (as was the case in December).

Some argue that if the Fed does not hike in June, a reemergence of global or financial market stresses could keep policymakers from being able to act in July. However, rather than viewing June as a missed opportunity in that event, we think Yellen would view renewed downside risks in July as a validation of her decision to show caution in June.”