FED: The Waiting Game

Coming into 2016, the FOMC (Federal Open Market Committee) projected four separate rate hikes, as they seek to normalize monetary policy following the expansionary policy used to stimulate the economy post-2009. These projections came after a 25 basis point hike to the Fed's target rate in December 2015, which was the first rate hike since the pre-crisis days of 2006. Last December's hike was long awaited by bond market traders and was originally expected to occur during the Summer of 2015, but was delayed due to low wage growth in U.S. labor markets and economic troubles in both Greece and China.

Again, the FOMC have been unable to follow through on their projections, as wages are still significant lacking growth and inflation is lagging. In addition, the global uncertainty caused by Brexit earlier this summer, pushed any possibility of a rate hike back even further.

The chart below, from Bloomberg, shows the probability of an interest rate hike in September.

This chart is current as of August, 26th 2016 and demonstrates the stabilization of the global economy in a post-Brexit world. The possibility of Brexit was largely underestimated during the week leading up to its occurrence, as market sentiment projected about a 30% chance of it taking place following Jo Cox's (British Labor Party M.P.) murder. The uncertainty brought about by this phenomenon as well as the negative yields in Japan and Germany, tied the hands of the FOMC and prompted them to continue pushing off further rate hikes. 

Now, following some market stabilization and decent summer labor data (excluding August's low jobs number), Fed Fund Futures trading implies a 32% chance of a September rate hike (as of 8/26). Markets will be watching short term treasury yields as a leading indicator of a hike coming into the September meeting.   

If there's one thing I've learned about the Fed through watching markets over the past 18 months, it's that nothing is solid, and although the Fed's mandates focus on inflation and unemployment, external factors consistently shift the sentiment of the FOMC. It will be interesting to see if more global events shift the rate-hike timeline, or if the domestic presidential election will cause the Fed to be more dovish through the end of 2016 (due to the political uncertainty and their tradition of relative inaction during election years).

 Read more about the Fed's election year tradition here on MarketWatch

Watch more about Fed Chairwoman Janet Yellen's recent comments on the state of the economy here on "Bloomberg Markets"

Bill George