US bank stocks have mostly rebounded from second-quarter lows, and the market has rallied past lows that came in late June after the United Kingdom vote.
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“These changes were modest but in an optimistic direction, and the improved risk assessment could begin to lay the groundwork for a hike in a few meetings’ time, provided the data cooperate”, wrote JPMorgan economist Michael Feroli on Wednesday. Right above this, the new line insertion says: “Near-term risks to the economic outlook have diminished”.
That said, it will be the wording of today’s FOMC statement that will, or will not, send an appropriately hawkish message without disturbing worldwide markets too much, while it may well be the Fed would still prefer to avoid too much fresh dollar strength from here on.
Remember, on June 15, Fed Chair Janet Yellen explicitly said in her press conference: “Brexit, the upcoming United Kingdom decision on whether or not to leave the European Union, is something we discussed, and I think it’s fair to say that it was one of the factors that factored into today’s decisions …” In the accompanying statement the USA central bank detailed their view that the long-term United States growth consequences of the UK “Brexit” vote were likely to be minor and they also dispelled the risks from the weak U.S. non-farm payrolls that presented in May.
Since the Fed’s meeting in June, “the labor market strengthened and…economic activity has been expanding at a moderate rate”.
It appears that the Fed funds futures also see in the FOMC statement an increased chance of a rate hike for later this year. Shortly after, however, as the markets digested the Fed’s characteristically non-committal comments that gave no indication as to the potential timing of a future rate hike, the precious metal surged on the continued interest rate uncertainty. And the Fed is signaling that things are looking better.
The conversation could change if the US economy picks up more momentum. “They seemed to check all the boxes in terms of giving a more upbeat tone”.
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Some seasoned Fed watchers are betting the Fed is flagging a possible September move, to prepare markets for the real intended tightening in December. In that statement, the Fed had removed a dovish-phrase that had previously added fuel to markets under the presumption that the Fed wouldn’t hike anytime soon; so this was somewhat of a “less dovish” example of wordsmithing.
