The best kept secret for the Fed is when it will raise rates. The uncertainty on when seems to be all but gone. There is no telegraph message but if you ask economists, 80% think it will be September based on what has been told the market. This moved from 25% at the beginning of the year. However, we will note that the Fed fund futures which is the aggregation of market opinions is a more suspect on September action. It is focusing more on December. Chairman Yellen has said it will most likely be this year, but all eyes are focused on September.
The issue is now what will happen if the Fed does not raise at their September meeting. At this point, the Fed is almost locked into action in 2015 and many Fed officials handicapping September. Looking at the first case of some Fed action, there should be limited market response given it has been discounted by the market. The focus will be on the language and the path of gradualism.
However, if there is no action in September there will be a much stronger market response based on the uncertainty. First, it will be a surprise. Second, it will confirm that something is going wrong with the economy. A delay will be associated with a global crisis or some weak economic numbers. There is less likely to be a global crisis issue given the Greece and China events have been dealt with through further kicking of the can down the road. Nevertheless, an increase in either crisis area will be a flashpoint for delay. In the case of economic data, there are only two months of data that can be announced and we are reaching the slower summer season. Inflation numbers are unlikely to increase and unemployment is unlikely to have any major surprises. There will have to be a new external surprise or a major change in US data. Both are unlikely.
There will be some focus on the July Fed meeting at the Jackson Hole conference, but the glide path for September is clearly set by economics. The question is whether the market and Fed follows this story.
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