US: Fed unlikely to make July rate hike, say analysts

By Ovunc Kutlu

NEW YORK

It is unlikely the Federal Reserve will raise interest rates this Wednesday after its two-day July meeting, experts told Anadolu Agency on Tuesday.

"I don’t expect any change in monetary policy at the Fed’s July meeting," said Mark Zandi, chief economist at Moody's Analytics.

"The Fed remains cautious about still below-target inflation, volatility in financial markets and potential fallout from geopolitical events such as Brexit," he added.

For a rate hike, the central bank has adopted a cautious stance against a number of factors throughout the first half of this year, such as potential risks in foreign economies, the fragility in global markets and the U.K. voting to leave the EU.

Ryan Sweet, director at Moody's Analytics, also pointed to Brexit and said the Fed wants solid evidence that risks of a spillover effect on the U.S. economy from the event are small.

Stating that the bank's July meeting would be uneventful, he said: “The Fed isn’t convinced that inflation is moving toward their inflation target as quickly as they wanted.”

The central bank has a two percent inflation target, whereas this number stood at one percent through the 12 months ended June 2016.

Meanwhile, global financial markets and positive sentiment in the U.S. stock market are being watched closely by the Fed.

Wall Street has been breaking fresh records for the last two weeks, finishing last Friday with a fourth straight weekly gain and the central bank will not want to disturb this bullish sentiment.

"I strongly believe that the Fed is much influenced by global markets," said Matthew Carbray, managing partner at independent wealth management firm Ridgeline Financial Partners.

"I don't think it [a rate hike] will happen...The market is the driving force behind these decisions. As much as we have experienced very strong market conditions, the Fed also understands that this is a very cautious environment that we are in," he explained.

What to expect on Wednesday

It is clear the Fed will not raise interest rate at its July meeting, but the question remains whether the bank will give any signals about a rate hike for the remainder of the year.

"The Fed is going to have to try and pull off one or two rate hikes this year without causing the dollar to strengthen significantly, which would hurt growth," Sweet said.

"It may delay signaling a move until it is clear that a rate hike is imminent. Therefore, we don’t believe they will signal a hike," he added.

However, Carbray stated that the bank "has not being very credible," especially given the fact that there have been improvements in employment, growth and inflation figures.

"I think the forward indication will be strong [about a rate hike this year] ... Enough has gone by to see that there is real growth out there, and hopefully they will give the strongest indication, more than they ever had," he explained.

Carbray said he thinks there will be one 0.25-basis-point rate hike in either September or December, adding the likelihood is September, rather than the end of 2016.

However, Sweet stated that he believes there will be no changes in the Fed's forward guidance on Wednesday that would hint at a September rate hike, and added he thinks the odds of a September rate hike are 25 percent and a December hike 60 percent.

Meanwhile, Zandi said the Fed "is happy with current market expectations for a December rate hike," and noted he thinks there is a 30 percent probability of a rate hike at the September meeting, and a 65 percent probability at the December meeting.

The Fed had increased its benchmark interest rate by 0.25 of a basis point last December – its first rate hike in almost a decade.

After the July meeting, the bank's next gathering on rate decision will be on September 21.