No Hurry, But Rate Hike Looms For Sometime This Year (Maybe)

One and done. Or two and through.

One of Wall Street’s favorite parlor games is to guess when rate hikes are in the offing and when they are not. The game has some real consequences, as it affects the directions of both the stock and bond markets.

So, for Fed interest rate hikes, as is the case with so much else in life, timing is everything. We’ve already picked over the jobs report that sparked a (minor) tizzy last week, and with the conventional wisdom that a hike is off the table in June, the question remains as to whether July is the magic month or whether some other later date will be.

The fact that Treasury prices rose a bit on Tuesday (June 7), with the attendant effect of pushing yields lower, shows that the yield on the two-year Treasury is at its lowest level since the middle of May. Last week, Fed Chair Janet Yellen sidestepped at least some language that was (carefully) disseminated, which said the Fed would likely raise rates within the next couple of months (which means now and beyond).

Lo and behold, that same language has been struck from the most recent commentary, and the dismal jobs report makes it dead certain, pretty much, that nothing is going to happen next week. The odds of a July hike may be sinking, too, as we’d likely have to make sure that the “38,000 awful headlines that we hope are not true” event from last week proves to be a one-off. Maybe it isn’t, as the two months before that were downwardly revised, too.

Where does that lead us for a rate hike? The most recent curve in the roadmap came from remarks just disclosed from the beginning of this week, where Yellen stated: “I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones.”

Translation: It seems that the latest jobs data, in her eyes, is a fluke or, barring flukiness, remains only a piece of the puzzle and not the biggest piece. Inflation still remains low enough that it alone would not be the other determining factor on its own. But the Fed telegraphed two rate hikes this year, which means that some movement is likely, barring a major economic data point that looks to be catastrophic. The onus seems to be on the data, with a central bank’s collective mind already made up, looking for positive reinforcement for a rate hike.