During the previous week, the Fed revealed that an interest rate hike in the month of June is on the table. Markets responded to this statement with a sell-off in the stock markets and Treasuries, as well as a rally in the greenback. Regardless of the mention of June, an interest rate increase in the month of September appears to be more likely.
Similar to the Fed rate hike in December last year, the US central bank threw out the possibility of an increase in rates before the economic conditions are actually ideal for one. So by the time the Federal Reserve hikes interest rates, the bond markets and money markets have already adjusted accordingly and the surprise is minimal.
Although the Fed explicitly mentioned June, further analysis of the FOMC statement made it clear that a September hike is also possible. The FOMC minutes indicated that, “Data has to be consistent with a pickup in growth in the second quarter, a firm labor market and the FOMC inflation target of 2%, to warrant a rate hike.”
However, it is difficult to see economic data underpin an uptick in growth before Q2 GDP growth is released. Although growth in retail sales, PMI readings, or credit can imply a pickup in Q2 growth, only an actual GDP figure will verify it. Given the downbeat Q1 data, it can be considered as an unnecessary risk for the US central bank to increase interest rates prematurely.
On the other hand, an interest rate hike in September appears more convenient as Q2 GDP growth will be known by then. Furthermore, indicators could signal whether growth for the third quarter seems solid.
If a June rate hike will occur, it will most probably trigger an equity market sell-off and investors will run to safety. Obviously, the US dollar and the Japanese yen would benefit. Meanwhile, if the Fed raises interest rates in September, the greenback will become broadly stronger,but a flight for safety is less likely to be triggered.
For now, market players should watch out for the Nonfarm Payrolls and the Consumer Credit data for indications regarding the Fed rate hike.