Fed minutes: US is set to continue with what looks a Mission Impossible - Rabobank

Michael Every, Head of Financial Markets Research at Rabobank, suggests that the key thing to take from yesterday’s Fed minutes is that the US is set to continue with what looks a Mission Impossible (or at least Improbable) to try to escape from the structural new normal by raising interest rates, rather than dealing with it by keeping them low, or lowering them further.

Key Quotes

“Indeed, the Fed minutes noted that “Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2% objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.”

The Fed needs to see higher Q2 GDP (and the Atlanta Fed’s GDPNow has notably bounce to 2.5% of late, so ‘tick’); sustained jobs growth (which, despite the disappointing headline payrolls number for April still appears to be the trend, so a smaller ‘tick’); and a rise in inflation (and after this week’s CPI reading, that’s also a ‘tick’).

Arguably, therefore, all we also need is an absence of any wobbles from the global economy (i.e., China, the implications of a possible Brexit, etc.) and - as cynics might argue - the S&P to remain around current levels, and a June looks a ‘live’ meeting. The Fed Funds futures market has responded to that message with a massive increase in the odds of a June hike: on Monday it was 4%, and today it’s 32% - quite the shift, even if not yet a case of “So say we all”. At the same time US 2-year yields surged 6bp and hit the psychological 0.90% level this morning in Asia, and for once 10-years followed suite, rising 8bp to 1.86%.”