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    June FOMC Preview: Waiting for better data (and less volatility) – Nomura Sandeep Kanihama

    Research Team at Nomura, suggests that they do not expect the FOMC to indicate that an interest rate increase is likely over the summer and expects the Committee and Chair Yellen to suggest a July rate hike is still possible given the right circumstances but do not expect them to suggest that the next hike is imminent.Key Quotes“We see essentially no chance of a rate hike at the FOMC meeting today. The immediate outlook for growth has improved somewhat but remains uncertain, and financial markets are on edge in large part because of the UK referendum on membership in the European Union.As for a July interest rate increase, we do not expect the FOMC to signal that it is “off the table”, but a decision to raise rates in July would probably require a broad improvement in economic data and a reduction in uncertainty that is currently weighing on markets. A vote by the UK electorate to remain in the European Union would probably help to stabilize markets. However, in order to raise rates at the July meeting, the FOMC will still want to see convincing evidence that the US economy is growing faster than its potential. That is possible, but not the most likely outcome given that we are only seven weeks away from the July FOMC meeting.Given these circumstances, we do not think that the FOMC will want to try and move near-term market expectations regarding the likely timing of rate hikes in coming months. We expect Chair Yellen to stress the key themes from her speech last week. That is:In this context, we do not expect Yellen to suggest that another interest rate increase is likely “in coming months” (as she did at Harvard on 27 May.)The FOMC Statement We expect some changes to the FOMC’s backward-looking assessment of economic developments. Ironically, while aggregate demand has picked up in recent months, labor market performance has deteriorated. We think that will be reflected in the first paragraph of the FOMC statement. We also expect the FOMC to acknowledge that survey measures of inflation expectations are again “edging down”.We do not think that the circumstances warrant any change in the general language describing the FOMC’s forward-looking outlook and the way it is monitoring risks.The FOMC’s economic outlook We expect the FOMC to adjust its economic forecasts for 2016 to reflect data that has been released since the March FOMC meeting. This will likely mean a modest downward revision to the medians for 2016 GDP and the unemployment rate. On the other hand, we expect an upward revision to the median headline PCE inflation forecast for 2016, as crude oil prices have trended higher.”

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