Fed isn’t raising rates this summer

U.S. economic data have improved since the June FOMC meeting and the strong bounce-back in employment growth in June is particularly notable. This is very similar to the bank’s posture in Q4 of last year when, despite the numerous flagging risks of commodity prices getting crushed while Chinese markets continued to implode, the bank talked up the prospect of higher rates in the US, even going so far as to expect a full four rate hikes in 2016 after the first rate hike in over nine years in December.

“The FOMC is acknowledging the post-Brexit calm in the markets, but is still cognizant about the uncertainties in the global economic outlook”, Bank of America Merrill Lynch economists wrote Wednesday.

The Federal Reserve chose to leave the Federal Funds rate unchanged on Wednesday, but said “near-term risks to the economic outlook have diminished” – although the change in language had little impact on equity and commodity markets.

However, Sweet said he believes there will be no changes in the Fed’s forward guidance on Wednesday that would hint at a September rate hike, and added he thinks the odds of a September rate hike are 25 percent and a December hike 60 percent. And the Fed is signaling that things are looking better. The comment on interest rates, however, showed a non-committal stance from the Fed, and is what likely caused the selloff in the Dollar.

Another contributing factor for maintaining historically low interest rates was the recent United Kingdom referendum vote to exit the Eurozone – deemed “Brexit” – which rattled markets and sent volatility to multi-year highs. The Fed’s continues to have an undefined timetable for the next rate hike in the normalization process.

“The flight to safety is real right now”, said Bob Haberkorn, senior market strategist at RJO Futures, adding that Friday’s GDP figure “puts in the nail in the coffin” for an interest-rate increase by year’s end. Stronger data in the USA may see traders attempting to anticipate any potential moves from the Fed by pricing-in United States dollars strength (much like the price action seen in the month of May).

“This opens the door for two rate hikes, beginning in September”, says Curt Long, chief economist at the National Association of Federal Credit Unions. Some market participants stated overnight that the Fed could act as soon as September. “They seemed to check all the boxes in terms of giving a more upbeat tone”.