June 2016 rate hike odds rise after US Fed minutes

A hike in short-term interest rates could well be on the table when rate-setters in Washington DC meet in mid-June, the minutes of their most recent deliberations showed.

According to the summary of the 26-27 April FOMC meeting, policymakers wanted to push back against expectations by markets participants that no move was likely at their 15 June conclave.

Rate-setters juxtaposed the strengthening seen in the jobs markets against a slowdown in the economy.

As of 19:49 BST the yield on the benchmark 10-year US Treasury note was sharply higher, jumping by nine basis points to 1.87%, compared to where they stood at 1.84% just before the release of the market-sensitive document.

In parallel, two-year US Treasury note yields climbed seven basis points to 0.91% versus 0.88% before the release of the minutes.

The implied probability of a rate hike come 15 June stood at 33.8% as of 19:52 BST, according to the Chicago Mercantile Exchange’s Fed Watch tool.

That was up from the nearly zero odds they had been pointing to just a few weeks ago.

The critical spark for that shift came on 12 May when Boston Fed president Eric Rosengren explicitly stated that a June rate hike was a real possibility.

Aside from being known for being of a more ‘dovish’ slant, which in itself made his remarks noteworthy, he was also a voting member on the US Federal Open Market Committee in 2016.

"At this meeting, "a few" members thought an immediate hike would be justified, compared to "a couple" in March. Clearly, then, these minutes reflect a substantial step towards the next hike. [...] The latest polls point clearly to the U.K. voting to remain in the EU, but the risk of exit is not zero and a cautious Fed - like this one - likely will view the cost of waiting a while longer to be quite small," was the view from Ian Shepherdson, chief economist at Pantheon Macroeconomics.

"The drumbeat of more hawkish Fed speech over the last couple of days has certainly been a right step in that direction, and the minutes (almost) helped to hammer the message home. [...] What is needed to completely convince markets is confirmation from Chair Yellen and/or her two Vice Chairs Fischer and Dudley, combined with another solid employment report. It is all on the table," said Dr. Harm Bandholz, chief US economist at UniCredit Research.