By Danny Jasper, Senior Vice President, Capital Markets

The Federal Reserve will make their statement from the conclusion of their July two-day FOMC meeting later today at 2p.m. Eastern.  Speculation continues to be rampant and on both sides of the scale as to whether or not the Fed will hint at their next meeting in September as the month of the first rate hike, or if recent global concerns and somewhat soft domestic data will force the Fed to put the increase on hold until December or even later.

A few weeks ago, greater than 70% of investors surveyed indicated an expectation that the Fed would begin hiking rates in September, but that number has since dropped down to a 52% likelihood.  This has been caused primarily by continued global weakness in Europe and Asia, a sharp drop in commodity prices that directly correlates to slowing down inflation, and recent U.S. economic data that has shown continued job and housing growth, but not at the pace seen earlier this year.

There is zero expectation that the Fed will openly announce when their rate hikes will commence today, but minor wording changes go a long way in relaying their sentiment.  Will the Fed change their language about risks on economic growth due to the recent global developments?  Will they sound dovish on Q2 GDP expectations?  Will they push back their estimate on inflation trends?  Who will dissent?

Chicago Fed President Evans has been dovish on the economy and Richmond Fed President Lacker has been bullish, so if either dissents does that imply that the Fed is moving one way or the other?  With no press conference after today’s meeting, everyone will be dissecting today’s statement with a fine tooth comb.

What to Expect During the Fed Meeting

During their FOMC meetings, the Fed assesses three macro questions as they decide what they will do on monetary policy and rates.

  1.  Is job growth sufficient to support a sustainable strong labor market moving forward?  The answer to that question is likely yes, though job growth has slowed over the last couple of months a bit. Additionally, the participation rate and wages remain relatively underwhelming.
  2. Is the Fed confident that inflation can reach the Fed’s 2% target over the “medium term”?  That answer has certainly evolved recently, particularly with global pressures and the bloodbath that has occurred in commodity prices, but growing sentiment from the talking heads is that inflation will have a very hard time picking up at the rate the Fed hopes.
  3.  Can the U.S. economy handle the rate hike once it happens? The Fed’s thinking on this is yes, as long as they rise at a slower pace, which they have repeatedly said is their intention once hikes begin.  Whether or not the global economy can handle the rate hike remains to be seen, but it is important for the Fed to remember that they are the central bank for the United States and not the entire world (and Yellen knows that), so they may shrug off some of their concerns they have about global effects.  At the end of the day, the Fed has repeatedly said that rate hikes will begin this year, so whether it’s slotted for September or December, the borrowing rate cannot stay at zero forever.

Looking at today’s U.S. economic data, pending home sales were down month-over-month in June -1.8%, caused primarily by strong rises in home prices and low inventory.  On a year-over-year basis, purchase contracts came in right on the screws at +11.1%, but were revised lower for May from +8.3% down to +7.9%.  Pending sales last month were higher in the Southwest and the West by 0.5%, but were lower in the Midwest and the South.  Not a great report, but not terrible either.  Mortgage applications were up 0.8% last week, as interest rates rallied a bit over that time.