The odds for a "rate response" at the September FOMC meeting have increased over the last weeks. My estimation of those odds first increased (to 30% from 25%) with an interpretation of the July FOMC meeting minutes as indicating some policy makers were nearer to adjusting their way of relating to recent incoming data. Subsequent data continues to support the Fed’s dual mandate achievement, but the pace at which the output and employment gap are narrowing has slowed. Additionally, only modest improvement of late in inflation data has some policy makers still unwilling to commit to accommodation removal at this time.
More recent rhetoric from Fed Dudley, Williams and Fischer along with the Jackson Hole speech from Fed Chair Yellen has prompted a further upward revision in the probability for a September rate hike to 35% from 30%. Clearly a strong employment report on Friday is a requisite for a September Fed response. With such a report and absent any new "risk-off" events, the chances for a September rate hike would increase dramatically.
Martin McGuire is managing director at TJM Institutional Services