"The FOMC kept rates unchanged at its 26-27 July meeting, as widely expected. The statement evolved in the way we had expected and if anything, went a little further in preparation for a hike. We think the statement sent a clear warning sign that a hike could be on the horizon as "near-term risks to the outlook have diminished." The odds of a September hike look better than even, and it seems as though the Fed is preparing for one as long as the data fall in line. We expect Fed communication to shift further over the coming weeks, with data releases doing most of the work. Upcoming Fed speeches, the minutes of the July FOMC meeting, and Yellen's Jackson Hole speech will all be important.
The Fed just lowered the bar jobs need to achieve to motivate the next hike. Overall, this increases our confidence in our change in view last week from no change in Fed funds to forecasting a hike in September. Upcoming speeches and the minutes will likely shift market expectations in our direction. Payrolls are also expected to be supportive - we expect 175k in the next report, which is comfortably above the level we now think is the threshold for a hike - around 130k.
We continue to see a good odds of a September hike with a second being partially priced in for December.
We do not expect a December hike to be delivered as a September hike will likely tighten financial conditions and we expect a medium-term outlook which is more pessimistic than the Fed's".
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