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Markets expect Fed to raise rates in July

Ian Kernohan, Economist

6 June 2016

Even before the latest US Labor Market Report, a June US Federal Reserve (Fed) rate hike was unlikely, given the approaching Brexit referendum.  The May payroll report removes any lingering uncertainty.  The three month moving average measure of private payroll growth has fallen below 120k (chart), which even allowing for the impact of Verizon strike, represents a material slowdown. 

Other labour market trends, including jobless claims and job openings, remain more robust, while tracking GDP estimates for Q2 are now running at close to 3%, thanks in part to a pick-up in consumer spending (chart).  These are important data points, however it is the monthly labour market report which takes precedence. 

The Fed feel that current economic conditions do not warrant “emergency” levels of interest rates, especially with inflation set to rise.  In recent weeks, various Federal Open Market Committee (FOMC) members, including Chair Yellen, have been trying to move market expectations in favour of a summer rate hike, and until the latest payroll number, they had largely succeeded.  Given that the Fed will not hike unless markets are well prepared, it will take a run of stronger data, particularly labour market data, to shift expectations back again in favour of a July hike.  This is still very possible since there is a long way to go before the July meeting, however the Fed’s mission to lift interest rates appears to be continually frustrated.


The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.