Two hikes from the Fed this year? Still unlikely, says expert

It should come as no surprise that the U.S. Federal Reserve has decided to maintain the target range for the federal funds rate at 0.25% to 0.5% percent.

But what’s encouraging is the Fed seems positive on the economy. “We didn’t get an outright hawkish tone from the Fed, but the central bank has a less dovish tone,” says Prab Sagoo, associate director at Nasdaq Advisory Services. “This is significant because, as we go into September, we’re looking forward to a press conference from Chair Janet Yellen, and we’ll get additional data and explanation.”

Prior to today’s announcement, the Fed seemed very uncertain about global risks, he adds. But the central banks says near-term risks have diminished and, in particular, “the risks presented by the Brexit vote have very much contained themselves to the U.K. and somewhat to Europe, with the U.S. remaining insulated. The Brexit situation is solved for the near to medium term.”

Read: How Brexit is hurting European banks

Further, says Sagoo, “The May payroll numbers came through very weak–the weakest in several years. But with the increasing strength of the labour market, the Fed seems to see May’s numbers as more of an abnormality.”

On the back of the central bank’s optimism, Sagoo has seen more movement into equities. “Markets had been in the red and there was sideways trading, with people waiting to see notable Fed news. Nothing notable did come through, but markets will continue to pick up as investors [digest] how comfortable the Fed is with the economy and global risks. Gold is also increasing today,” due to concerns around inflation and currency spikes.

Read: Gold: Ultimate safe haven, or just a shiny metal?

In comparison, income-heavy sectors such as utilities and REITs are still sitting in the red, Sagoo says. This isn’t a surprise due to the potential for rates to rise this year.

Read: Take advantage of real asset price gaps

The Fed still expects two rate rises by the end of the year, but that’s unlikely, says Sagoo. “Two hikes would be difficult. If data comes in to support that, and if the U.S. economy takes off in Q3 and Q4, that could be in the cards.”

But, “as GDP and industrial numbers continue to show a positive tilt, that will most likely give the Fed more ammunition to raise rates in September or by the end of the year.”

The Fed’s outlook

In its release, the Fed says, “Information received since the Federal Open Market Committee met in June indicates the labor market strengthened and that economic activity has been expanding at a moderate rate.”

And, “Job gains were strong in June, following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months. Household spending has [also] been growing strongly, but business fixed investment has been soft.”

However, the Fed notes, “inflation has continued to run below the Committee’s 2% longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.”

Read: Don’t let Fed meetings rattle long-term focus

Along with keeping rates at current levels, the Fed is “maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities, and [its policy] of rolling over maturing Treasury securities at auction. It anticipates doing so until normalization of the level of the federal funds rate is well under way.”

All but on governor voted for maintaining the rate. Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 0.5% to 0.75%.

Read: U.S. Fed shouldn’t be data-dependent: Tal

Prior to the Fed’s annoucement, CME Group’s FedWatch tool–which is based on CME Group 30-Day Fed Fund futures prices–found 96.4% of the market expected the central bank to stand pat. This was slightly lower than yesterday’s reading of 97.6%.

But now, looking to September, only about 75% of the market expects nothing to happen.

Expert reactions

“A month of better data wasn’t enough to radically change the Fed’s tune, particularly with FOMC members likely feeling chastened after a series of flip-flops on the rate outlook,” says CIBC’s Avery Shenfeld in a release.

“July’s statement didn’t deliver a rate hike, and held on to much of the text from June,” he adds. “Still, it had to give a nod to the improvement in the last employment report [and] argue that ‘near-term risks to the economic outlook have diminished.’ George also returned to her earlier position as a dissenter.”

Shenfeld notes “these subtle changes do suggest some progress towards a rate hike, [but] there’s nothing here that points to September, and we’re retaining our projection for a hike in December.”

Still, some economists think a hike is possible in September, if hiring remains solid and the turbulence that followed Britain’s vote to leave the European Union continues to stabilize, reports Associated Press. It adds that the more positive tone of this month’s statement, compared with the previous statement in April, will likely raise expectations of a hike in the fall.

A few months ago, adds AP, it was widely assumed that the Fed would have resumed raising rates by now. But that was before the U.S. government issued a bleak May jobs report and Britain’s vote to quit the EU.

Since then, a resurgent U.S. economy, the bounce-back in hiring and record highs for stocks have led many economists to predict a Fed move by December.

Read: No U.S. rate hike expected until end of year