It's hurry-up-and-wait time at the Federal Reserve.
U.S. central bank officials need three things in order to substantively consider hiking interest rates for the first time in 2016, they explained in meeting minutes issued Wednesday: confirmation that growth is picking up, jobs gains that are sufficient, and inflation that's rising to a target pegged by several economists at 2 percent.
Two of these things are iffy, in terms of their immediate prospects, and one is downright unlikely. U.S. inflation flagged in the wake of the global financial crisis and has been well short of 2 percent. Economic data and jobs numbers may not match Fed expectations either. It doesn't seem as if the Fed can raise rates, at least not in its meeting later this month, and probably not at all this year.
At least, that's what the market sentiment is.
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.