On Friday during a speech at Harvard University’s Radcliffe Institute, Fed Chairwoman Janet Yellen suggested that an interest rate hike could be appropriate in the coming months which comes as investors shift away from first quarter earnings results, watch for signs of slowdowns in U.S. and Chinese economies, and brace for the possibility of a Brexit in late June.
Fed Chairwoman Yellen explained that if the U.S. economy continues to improve another interest rate hike could be approaching.
“It’s appropriate, and I’ve said this in the past, I think for the Fed to gradually and cautiously increase our overnight interest rate over time and probably in the coming months, such a move would be appropriate” Yellen said on Friday at Harvard University.
An interest rate hike may occur as early as the Fed’s next policy meeting in mid-June which would mark a 6 month milestone following the Fed’s first rate hike in nearly 10 years during their December policy meeting.
Fed Chairwoman Yellen emphasized that a future rate hike is “data dependent” meaning that it hinges on the U.S. having improving economic data in the approaching weeks to give voting Committee members at the Federal Reserve enough confidence to vote for another rate hike.
The Fed has held their prime interest rate with federal funds between 0 and .25 percent since December 2008 during the depths of the Great Recession but voted to raise them slightly by .25 percent at their December 2015 policy meeting to between .25 percent and .50 percent.
As of Friday 5/27 the CME Group FedWatch projects a 71.9 percent implied probability of an interest rate hike from its current level of .50 percent during the Fed’s next policy meeting from June 14-15th.
Current probability for an interest rate hike in September rising from .50 is only 32.2 percent; however, its other September probability reading to .75 percent from .50 is currently standing at 46.4 percent which could be a volatile time to raise rates just ahead of the U.S. presidential elections in early November.
Last Friday the U.S. Bureau or Economic Analysis reported that a second estimate of 1Q 2016 U.S. GDP came in at 0.8 percent, higher than the 0.5 percent reading in the first GDP estimate but below the 1.4 percent in 4Q 2015.
The Week Ahead
During the shortened trading week in the U.S. due to Memorial Day on Monday, economists and investors will be digesting a wide variety of economic reports including closely watched inflation and jobs data for signs about the resiliency of the U.S. economy to handle an interest rate.
On Tuesday the Fed’s preferred inflation gauge, the Core Personal Consumer Expenditures (PCE) index will come into focus for April.
As part of the Federal Reserve’s dual mandate, the Fed maintains a 2 percent inflation target.
In March the Core PCE Index (minus food and energy) rose 1.56 percent year over year, lower than the downward revision of 1.72 percent in February.
On Friday investors will pay close attention to May’s non-farm payroll report which is expected to show an increase of 155,000 non-farm payroll jobs according to a consensus estimate from briefing.com., following an increase of 160,000 in April.
Some of the other market data this week includes Chicago PMI, Consumer Confidence for May, and the Case Shiller 20 city index for March that will be reported on Tuesday.
On Wednesday private sector payroll processor ADP will report May payroll employment change.
Economists from briefing.com have a consensus forecast of 180,000 private sector jobs in May after 156,000 in April.
Also on Wednesday the Fed’s Beige book for June, construction spending for April, and the ISM index for May will be digested in the market.
May’s ISM index is expected to show a 50.4 percent expansion, according to a consensus forecast from briefing.com, which would represent a slight decline from 50.8 percent in April.
Car/truck sales for May will also come into focus on Wednesday.
On Thursday OPEC will meet in Vienna, Austria on the same day that crude and natural gas inventories are reported for 5/28.
Continuing and initial U.S. jobless claims are revealed on Thursday in addition to Challenger Job Cuts (May).
Friday will see the May non-farm payroll report in addition to the trade balance for April, factory orders for April, and ISM Services for May.
Written By: Johnathan Schweitzer