Fed: The June rate hike that never came

Only a few months ago, the market consensus and the expectation of the FOMC was that the first rate hike was going to take place today. However, after a winter of disappointing economic data reality sank in and by the end of April the June hike was off the table. 

The economic recovery was likely to remain uneven and fragile. In fact, the negative effects of the dollar appreciation and the decline in the oil price in the second half of 2014 that are still visible today have confirmed that the US economy remains very vulnerable to these type of shocks.

During the course of May, the markets were finding it difficult to pinpoint a new date for the first rate hike and shifted between September, October, and December. Even 2016 came in focus, supported by the IMF and the World Bank actually advising the Fed to abstain from a 2015 rate hike and wait until next year.

However, when the strong Employment Report for May was released in early June, the markets switched back to September. While there will be a meeting at the end of July, the amount of data between the two subsequent meetings may not be enough to change today's verdict. 

The September meeting is the next with an update of economic projections and a press conference. This would provide the Fed a better opportunity to announce a rate hike than a meeting that is concluded only by a formal statement. Interestingly this impression of unequal meetings (those with projections and a press conference being more important) was underlined by Chair Yellen's response during the press conference that no decision has been made about September, December or March. She did not mention July, October or January.

The strong dollar remains a headwind for US exporters, and the low oil price has reduced the incentives to invest in the energy sector. What's more, consumers are still hesitant to spend their windfall gains from cheaper energy. 

"We expect only a modest re-acceleration of the US economy in Q2, which should delay the Fed's first rate hike to the final quarter of the year, most likely December",said Rabobank in a report on Thursday.