First Fed rate hike likely in September

The FOMC made no changes to policy rates, as was completely expected, in this the first of what should be a long string of "live" meetings (when there will be the potential for a rate hike each time). Apart from the economic assessment, the policy Statement was identical to April's. 

The conclusion that "economic activity has been expanding moderately after having changed little during the first quarter" permeated all the sectoral observations, particularly on the labour market, consumer spending and housing. Lingering headwinds owing to a strong USD and oil industry capex was reflected in the comment "business fixed investment and net exports stayed soft." 

In the Summary of Economic Projections, there were very little changes to the central tendency ranges except for real GDP growth in 2015. It was lowered to 1.8%-to-2.0% (1.9% midpoint) from 2.3%-to-2.7% (2.5% midpoint) before. Part of this is simple accounting for the weak Q1 result but part of this also reflects the fact that business investment and net export prospects have dimmed owing to the low-oil-price/strong-USD nexus. 

In the "dot plot" of fed funds forecasts, the median for 2015-end didn't change, but every projection now falls under the 1% mark. Interestingly, there are now five participants in each of the camps for one hike, two hikes and three hikes this year. 

The 2016-end median dropped by 25 bps to 1.63% (now implying 100 bps of tightening) and 2017-end was market down as well. The flatter trajectory reflects the hawks' now lower starting points and, importantly, a greater conviction among the doves that the policy normalization process is going to be very gradual. 

"We have been forecasting for a while that the Fed will start to hike rates in September, at a quarter-per-quarter cadence through the end of next year. We are sticking to our call, particularly since the FOMC now seems to have come around to it as well",says BMO Economics.