The market has almost totally written off the notion that rates will rise. The CME's FedWatch tool, which tracks market sentiment about the probability of a Federal Open Market Committee rate hike, effectively resigned itself to the expectation that there will be no July hike. But market watchers have come around to realize that monetary policy crafted to steer U.S. banks away from collapse have become the norm — and the lingering issue is if, or when, the FOMC can depart from the new normal.
"We don't have a full-blown banking crisis now in the U.S.," said S&P Global Market Intelligence banks analyst Erik Oja.
Another key focal point for the Fed — economic data — will be coming in the form of spending, manufacturing and other important points in the next few weeks and leading up to September, which is the next time after July that the FOMC will be able to consider hiking rates. FedWatch data suggest that a September hike is almost as improbable as one later this month; but economists like Deutsche Bank's Joseph LaVorgna say they're sticking to their expectation of one hike later this year. A few more rocky jobs reports might scotch that altogether.
And then there's jobs: May's job figures were sufficient to give FOMC members some pause about what declining unemployment figures mean for their rate decision, although Fed members said Wednesday they were reluctant to base any decisions on one report alone. That makes this Friday's jobs figures even more crucial, regardless of what the Fed gleans from them. But it's certain that Fed leadership isn't bullish on the U.S. economy right now — Tarullo made that abundantly clear in his Wednesday speech.
Tarullo told attendees of a Wall Street Journal event on Wednesday that he needs to be "more convinced" on inflation before the Fed moves forward with a rate hike. With a goal of 2 percent, the FOMC — and markets — may be in for a long wait.