What to look out for from the Federal Reserve’s interest rate decision this evening
For a few brief hours this evening, markets will turn their attention away from next week's EU referedum.
Eyes will drift across the pond, to the most powerful central banker in the world, Janet Yellen. Tonight the US Federal Reserve's rate-setting Federal Open Market Committee (FOMC) will update the market on its latest economic thinking and spell out, as cryptically as it can, when it thinks the economy will be ready for a hike.
At its meeting last month the Fed said if the data held up a rise in June was "likely".
The data hasn't held up. A shocking monthly jobs report which came in well off expectations killed the prospect of a June rate hike. So, with no action on the table, it's back to the shenanigans of reading between the lines and watching every one of Yellen's utterances in the most market moving press conference going.
Read more: Is it too late to normalise monetary policy?
"The markets price zero chance of a rate increase at today's FOMC meeting," Societe Generale said this morning.
"Rather, the focus of the Fed will likely be on offsetting some of the messages of the weak jobs report with a more balanced assessment of the wider economy."
Other than pointing to the timing of the next rate hike, the Fed has been keen to move market expectations about both the number and pace of rate hikes over the next few years.
Once upon a time – during the last tightening cycle – the Fed hiked rates at pretty much every meeting
Financial participants are still not putting the chances of a rate hike at more than 50 per cent until the first months of 2017. There is only about a 20 per cent chance of a rise in July.
This is considerably off what FOMC members think will happen, so expect Yellen to downplay the poor jobs report – especially since she already addressed this in a speech last week – and strike a hawkish tone despite holding rates.
"With the committee expected to hold fire the challenge for Janet Yellen will be to find a line of argument that maintains expectations of two hikes this year, while simultaneously acknowledging that it is still a tough call to argue for higher rates," said Chris Beauchamp at IG.
John Higgins of Capital Economics added: "The FOMC will raise the federal funds rate in 2017 by far more than investors are currently anticipating in order to contain inflation."
All roads lead to Brexit
The importance of tonight's decision may be "second only to the EU referendum" on the financial calendar this month, according to Phillip Capital economist Ana Thaker, but the two events are far from separate.
"We are unlikely to escape a mention of Brexit at the Fed meeting today," Beauchamp said.
Four weeks ago the FOMC stated: "Global financial markets could be sensitive to the upcoming British referendum on membership of the European Union."
"Sensitive" proved to be a touch of an understatement as £100bn was wiped of the FTSE 100 in four days, government borrowing costs hit a record low and sterling crashed by almost five cents in seven days.
Therefore, the Fed will likely make reference to this uncertainty as just one reason it refused to raise rates. However, this could help Yellen's argument that the delay is temporary, paving the way for a rise in July should the UK vote to stay in the EU and the US jobs figures bounce back.
She may also use the press conference to update markets on any other steps the Fed will take to limit the threat of a Brexit spillover should the UK vote to leave. Yesterday, a senior European Central Bank (ECB) official said they stood ready to do "whatever it takes" to keep the market moving and is preparing to offer banks unlimited funding in both sterling and euros in the hours after the vote.
In short
A hawkish hold from the Fed, but will the markets buy it?