• The Fed holds its sixth of eight FOMC meetings of 2016 this Tuesday and Wednesday, September 20–21, 2016.
• With a rate hike unlikely, the Fed may begin to prepare the markets for a hike in December.
• Fed Chair Yellen’s third post-FOMC meeting press conference of 2016 provides an opportunity for the Fed to add color to its views of the economy, inflation, and financial market volatility, and to dodge questions about politics
As the sixth of eight Federal Open Market Committee (FOMC) meetings of 2016 approaches later this week, the market and the Federal Reserve (Fed) again remain deeply divided over the timing and pace of Fed rate hikes. In addition, the FOMC itself seems more divided, with many on the committee ready to raise rates now, while others urge patience.
WHAT IS THE SCHEDULE OF EVENTS FOR THE FED THIS WEEK?
The FOMC meeting this Tuesday and Wednesday, September 20–21, will be followed by an FOMC statement at 2:00 p.m. ET on Wednesday, along with the FOMC’s latest economic forecasts for gross domestic product (GDP), the unemployment rate, inflation, and fed funds projections (aka the “dot plots”) for year-end 2016, 2017, 2018, and for the first time, 2019, as well as the “long run.” At 2:30 p.m. ET, Fed Chair Janet Yellen will hold her third post-FOMC press conference of 2016, which is her first public appearance since her speech at Jackson Hole, Wyoming in late August 2016.
HAS THE MARKET PRICED IN A RATE HIKE AT THIS WEEK’S MEETING?
In short, no. As of Monday morning, September 19, the fed funds futures market has priced in just a 20% chance of a 25 basis point (0.25%) rate hike at this week’s meeting. Another good proxy for what the market is pricing in is the yield on the 2-year Treasury note, the Treasury note most sensitive to the Fed’s actions. The 2-year note yield has moved from 0.55% in late July 2016—in the aftermath of the late June Brexit vote and a weak June 2016 employment report (released in early July 2016)—to just under 0.80% here in mid-September 2016. At just 0.80%, the 2-year yield is below where it was (1.0%) when the Fed hiked rates in mid-December 2015 [Figure 1].
HOW LARGE IS THE DISCONNECT BETWEEN THE FED AND THE MARKET ON RATES?