With apparently disparate views on the FOMC, the June meeting will be an interesting leadership challenge for Fed chairwoman Janet Yellen. A nearly unified vote of 9-1 in April was helped by the prospect of more time (May–June) for economic data to provide policy support—and to change investor complacency about prospective Fed rate hikes. The June meeting could reveal more disagreement. Recent comments by some Fed officials suggest more resolve toward a policy move. At the same time, other Fed officials, such as Governor Lael Brainard and Vice Chair Stanley Fischer, may prefer to postpone action. After the release of April FOMC minutes on May 18, the recent strength in the U.S. dollar, weakness among U.S. equities, and a jump higher in U.S. Treasury yields may further inform the debate in June. The most important economic release could be the May employment report, to be released on June 3. A noticeable drop, or jump, in non-farm payrolls could tilt the decision and make Yellen’s job easier.
Summing Up
Barring a surprisingly strong jobs number, the preference of the Fed for the markets to fully anticipate policy moves before it makes them, the additional time for the economy to prove its resilience and the downside risks of a policy error of tightening too soon seem to increase the likelihood of July, rather than June as the next meeting for higher fed funds. In the meantime the insistence of some Fed officials that June is a possibility, allows investors the chance to manage expectations for July.
Zane E. Brown is partner and fixed-income strategist at Lord Abbett.