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Last week’s FOMC minutes sparked a sharp appreciation in the dollar, which broke to a 50-day intraday high. With rate hike expectations on the rise, the June meeting appears to be back on the table as a possibility. With this in mind, this week’s plethora of Federal Reserve speeches, culminating in an appearance by Janet Yellen herself, will go a long way to adjusting market expectations. Where do we stand and what should we expect in the coming weeks?
One of the most striking things about recent comments from Fed members has been just how hawkish they are, despite somewhat underwhelming payrolls numbers over recent months. Minutes from the April FOMC meeting highlighted a clear willingness to act within the committee given improvements across the economy. The removal of reference to external threats was notable and it is evident there is a push to get another hike across the line.
However, probably more important to come out of the minutes was the fact the committee felt the need to realign market expectations, which it felt was disproportionately geared towards inaction at the forthcoming meetings. This is exactly what we have seen recently and with each speaker’s public appearance, there is a growing willingness of the markets to acknowledge the credibility of a rate rise.
Friday is likely to be an extension of this, where Janet Yellen reiterates the committee is data dependent, with many of the pieces in place for a rate hike. The SNB demonstrated the impact an unexpected central bank policy shift can have.
There is a good chance the Fed is simply ensuring any potential hike does not happen due to a major shock to the system should it occur.
We have heard time and time again the rate decisions are ‘data dependent’, which according to some members has largely been met. Let’s take a look at some of the key data points the Fed will be following.
Firstly, market expectations reflect a rise in rate hike expectations over recent weeks, with the 4% expectation of a June rise last Monday, to the 34% today. Janet Yellen will know this and her comments will likely shift these numbers even more.