Market expectations for an interest rate hike after the Federal Reserve’s (Fed) June 13-14, 2017 meeting have reached 100%, as measured by Bloomberg’s World Interest Rate Probabilities. Just two months ago, the day after the Fed raised rates at its March 14-15 meeting; market-implied expectations of a rate hike at its June meeting were at 53%, per Bloomberg’s measure. What has changed to cause this quick jump in expectations?
The Federal Open Market Committee (FOMC) has emphasized in recent years that policy decisions are data dependent, meaning data related to jobs and inflation are key to its decision-making process to fulfill its mandate of maximum employment and price stability.
- March CPI data: Inflation data for March 2017 were broadly disappointing, which led rate hike expectations for June to fall to as low as 44% in April, as the chart below shows.
- French elections: Expectations recovered during the next few weeks, but the catalyst for a significant move higher was the first round of French elections on April 23, 2017. President-elect Emmanuel Macron’s victory reduced the potential for France to leave the European Union. This market-friendly result pushed rate hike expectations for June back up to 70%.
- May FOMC meeting: After the committee viewed recent weak economic data as transitory, rate hike expectations subsequently rose to 94%.
- April Employment report: Last Friday’s above-consensus jobs report was enough to push expectations to 100%.
With more than a month to go before the Fed’s next meeting, market expectations could still change, but the Fed ultimately makes the decision, not the market. However, the markets don’t like surprises, and the Fed doesn’t like to surprise the markets.