Federal Reserve cuts benchmark interest rate by 25 basis points

Fed Chair Powell says more rate cuts could be needed if economy weakens

The Federal Reserve voted to cut interest rates by a quarter-percentage point for the second time in as many months to cushion the economy against a global slowdown amplified by the U.S.-China trade war. While they left the door open to additional cuts, officials were split over the decision and the outlook for further reductions.

Voting for the today’s 25 basis point cut today were Federal Reserve Chairman Jerome Powell, John Williams, Michelle #Bowman, Lael #Brainard, Richard #Clarida, Charles #Evans, and Randal #Quarles. Voting against the action were James #Bullard, who preferred at the meeting to lower the target range for the federal funds rate to 1.5% to 1.75%, and Esther George and Eric Rosengren, who preferred to maintain the target range at 2% to 2.25%.

FOMC Chair Powell votes for rate cut., Stockwinners

The Federal Reserve said in today’s statement, “Information received since the Federal Open Market Committee met in July indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.”

Trade Negotiations

Fed Chair Powell said the Fed has to try to look through near-term volatility due to “complex” trade negotiations to react to the underlying economic situation. Powell said the central bank needs to be careful to not overreact but also to not underreact.

The Fed continues to see a strong labor market and reiterated that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low.

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There was still a split between solid household spending, but weakening in business fixed investment and exports. Inflation is still running below 2%, while market-based measures of remain low. The Committee continued to appeal to implications of global developments for the economic outlook and low inflation as rationale for the easing.

More from Powell: this is a time of difficult judgments and disparate perspectives. The bulk of the FOMC is taking it meeting-by-meeting. He continues to believe it’s better to be proactive when adjusting policy, and when trouble is seen approaching on the horizon, you should steer away from it if possible. The Fed has repeatedly shifted policy to support the economy, showing the Fed’s willingness to to move based on an evolving risk picture. There’s real uncertainty around the effects of the trade policy. On the funding issues seen this week, Powell said analysts took appropriate actions to address the pressures. If there are additional pressures, analysts have the tools to address the funding pressures and analysts will not hesitate to use them. The Fed will be returning to the question of when to build the balance sheet. The level remains uncertain, however.

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Feds Cut Rates on All Instruments!

Federal Reserve cuts federal funds target rate by 25 basis points

The Federal Reserve said in today’s statement, “Information received since the Federal Open Market Committee met in June indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low.

Powell, FOMC Chair, Stockwinners
Fed Chief Powell. Stockwinners.com

Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft.

On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.

In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain.

As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.”

Long Term Rates

The Federal Reserve also said in today’s statement, “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective.

This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will conclude the reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated.”

Bernanke came up with “Quantitative Easing” in 2008, Stockwinners

If you have no idea what the above paragraph means, this may help. Back in 2008, Ben Bernanke, then the Fed Chair, came up with a clever idea! Since the rates at the time where near zero. He needed a way to lower the rates, he started buying long term government bonds. The added demand for bonds caused bond prices to rise thus pushing the rates lower. In the past few quarters, the Feds have been selling these bonds, pushing prices lower, thus higher long term rates. Today’s announcement basically says Feds are ending the bond sales two months earlier, long term rates (mortgage prices) will now go lower.

Powell Comments

Federal Reserve Chair Jerome Powell said the easing was to ensure against downside risks, as he begins his press conference.

He acknowledged the shift in the policy stance since December’s pivot. Fed has seen both positive and negative developments since the June meeting, including a stronger job market, but weaker manufacturing and disappointing foreign growth, while contacts continue to cite ongoing trade uncertainties are giving companies pause.

The Committee has gradually lowered the assessments of growth and that led to the easing today. On whether a 25 bp cut will prop up inflation, he noted one has to look at the Committee’s actions over the year as it’s moved to a more accommodative stance.

The Committee is thinking of today’s action as a mid-cycle adjustment to policy, designed to provide support for the economy, ensure against downside risks, and support inflation. Chair Powell continued to appeal to downside risks and below target inflation as the main threats to the favorable outlook.

He added, the Fed will monitor the evolution of trade uncertainty, which do seem to be having significant effect on the economy. He thinks trade is a new factor that the FOMC will have to assess “in a new way.”

The chair again said it’s not appropriate to just look at the quarter point easing, but rather the evolution of the Fed’s stance from tightening to easing, with the economy picking up since the end of 2018, which suggests monetary policy is working (though he declined to take full credit for the economy’s gains).

10-year yields fall, Stockwinners
Ten year yields approach 2.00 percent, Stockwinners

Market Action

The Fed repeated it will “monitor” incoming information and will “act as appropriate to sustain the expansion,” not really suggesting the path ahead. The long end of the Treasury market is leading the way with the benchmark 10-year 4.4 bps lower to test 2.00, versus 2.023% just ahead of the announcement. The 2-year is down 1.4 bps to 1.83% versus 1.81% earlier. Hence, the curve has flattened to 17 bps from around 20 bps previously.

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No more rate hikes in 2019

Majority of Fed members see rates unchanged for rest of 2019

Members see rates to remain unchanged in 2019, Stockwinners

Minutes from the last Federal Reserve meeting read, “With regard to the outlook for monetary policy beyond this meeting, a majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year.

Several of these participants noted that the current target range for the federal funds rate was close to their estimates of its longer-run neutral level and foresaw economic growth continuing near its longer-run trend rate over the forecast period.

Participants continued to emphasize that their decisions about the appropriate target range for the federal funds rate at coming meetings would depend on their ongoing assessments of the economic outlook, as informed by a wide range of data, as well as on how the risks to the outlook evolved.

Short term rates should decline as 30-year rates rise, Stockwinners

Several participants noted that their views of the appropriate target range for the federal funds rate could shift in either direction based on incoming data and other developments.

Some participants indicated that if the economy evolved as they currently expected, with economic growth above its longer-run trend rate, they would likely judge it appropriate to raise the target range for the federal funds rate modestly later this year.”

Economic growth in 2019 likely lower than previous forecast

“Participants continued to view a sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes over the next few years.

Underlying economic fundamentals continued to support sustained expansion, and most participants indicated that they did not expect the recent weakness in spending to persist beyond the first quarter.

Nevertheless, participants generally expected the growth rate of real GDP this year to step down from the pace seen over 2018 to a rate at or modestly above their estimates of longer-run growth. Participants cited various factors as likely to contribute to the step-down, including slower foreign growth and waning effects of fiscal stimulus.

A number of participants judged that economic growth in the remaining quarters of 2019 and in the subsequent couple of years would likely be a little lower, on balance, than they had previously forecast. Reasons cited for these downward revisions included disappointing news on global growth and less of a boost from fiscal policy than had previously been anticipated.”


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Fed boosts rates by 25 basis points to 1.5%-1.75%

Fed boosts target for federal funds rate by 25 basis points to 1.5%-1.75%

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Fed boosts target for federal funds to 1.5%-1.75% 

The Federal Reserve says in today’s statement, “In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent.

The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation…

Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams.”

Jerome H. Powell, Chairman

In its updated economic projections of Federal Reserve Board members and Federal Reserve Bank presidents under their individual assessments of projected appropriate monetary policy for their March meeting, the Federal Reserve members kept their median expectation for the Federal funds rate at the end of 2018 at 2.1%, consistent with their December projection.

The projections, often referred to as a summary of the Fed’s “dots,” shows that the median expectation for the end of 2019 Federal funds rate is now 2.9%, up from 2.7% in the December projection.

The Federal Reserve says in today’s statement, “Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.

The economic outlook has strengthened in recent months.

The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee’s 2 percent objective over the medium term.

Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.”


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Meet the next Fed Chief

Fed Policy: the nomination of Powell as Fed Chairman is all but sealed

Meet the next Fed Chief. See Stockwinners.com for details

Fed Policy: the nomination of Jerome Powell as Fed Chairman is all but sealed. The secret was fairly well kept, but late yesterday newswires largely confirmed it.

The markets have already reacted, by and large, with yields having dropped from last week’s jump when John Taylor was seen as the leading contender.

The dollar did soften a bit further yesterday.

Powell has been a governor on the Federal Reserve Board since 2012, and never dissented. Hence, this is a “continuity” pick and he’s seen following the gradualist approach of Yellen (and Bernanke).

He is also seen as a moderate on regulatory issues too. His confirmation process shouldn’t be problematic since he was already cleared as a Fed governor.

Of interest, he would be the first Fed chairman without a Ph.D. in economics since Volcker.

Along with serving on the Fed Board for the past five years, Powell, 64, has worked inside and outside government.

He was a Treasury undersecretary from 1990 to 1993 under President Bush.

More recently he was a partner and managing director of the Carlyle Group.

Note that newly installed governor Quarles also once worked at the Carlyle Group (CG).

There will be four vacancies on the seven member Fed Board, assuming Yellen retires from her governor position, giving President Trump lots of opportunities to make his mark on the Fed.


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Harvey, August Job Report Delay Another Rate Hike

Fed funds futures rallied on the tepid employment report, Harvey damage

Harvey, August Job Report Delay Another Rate Hike. See Stockwinners.com Market Radar

Fed funds futures rallied on the tepid employment report, suggesting reduced risk for a third rate hike this year.

Indeed, implied rates have slipped to about a 25% risk for 25 bp increase, from 30% previously, and it had been hovering in the 33% range for much of August.

Note that September employment data is notoriously volatile, though with the broad-based nature of sluggishness in the report, it could take some time to recover the lost momentum.

Analysts are still bullish on growth into year-end, especially with the amount of rebuilding that will be needed in the aftermath of Hurricane Harvey (and with Hurricane Irma on the horizon).

However, it’s not clear there will be enough time between now and the December 13 FOMC decision to get the Committee on board for a tightening, especially if inflation remains tame.

AUGUST JOB REPORT

The U.S. jobs report undershot estimates with a 156k August payroll rise after 41k in downward revisions, though nearly all of the disappoint was concentrated in government, where analysts saw a 9k drop after 51k in downward bumps, and August payrolls historically underperform before upward revisions.

Analysts saw a 0.2% hours-worked decline with a workweek downtick to 34.4, and a 0.1% hourly earnings gain that left a fifth consecutive 2.5% y/y rise. The goods sector showed a 0.1% hours-worked drop despite a 70k payroll gain.

Analysts saw a 74k civilian job drop despite a 77k labor force increase that boosted the jobless rate to 4.44%, while the participation rate remained at 62.9%. Hurricane Harvey occurred after the BLS survey week and had no August payroll impact.

The disruptive effect of the hurricane may be fully offset by a rebuilding effect before the BLS survey week ending September 16, which lies a full three weeks from when the storm first struck.

HURRICANE  DAMAGE

Hurricane Harvey could be the costliest natural disaster in U.S. history with a potential price tag of $190 billion, according to a preliminary estimate from private weather firm AccuWeather.

This is equal to the combined cost of Hurricanes Katrina and Sandy, and represents a 1% economic hit to the gross national product, AccuWeather said. This is equal to a 25 bp rate hike by the Feds according to some estimates while others see that more like a 50 bp rate hike.

[youtube https://www.youtube.com/watch?v=ZZKo-159lvY?rel=0&controls=0&w=560&h=315]


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Wells Fargo’s Legal Expenses Soar

Wells Fargo raises view of possible legal losses above reserves to $3.3B

Wells Fargo to close 450 branches. See Stockwinners.com Market Radar for the story.

In a regulatory filing, Wells Fargo (WFC) noted that the company establishes accruals for legal actions when potential losses associated with the actions become probable and the costs can be reasonably estimated.

The high end of the range of reasonably possible potential losses in excess of the company’s accrual for probable and estimable losses was approximately $3.3B as of June 30.

“The increase in the high end of the range from March 31, 2017 was due to a variety of matters, including the company’s existing mortgage related regulatory investigations…

We expanded the time periods of this review to cover the entire consent order period of January 2011 through September 2016, and to perform a voluntary review of accounts from 2009 to 2010. We expect to complete this expanded review process and commence remaining remediation for these additional periods by the end of third quarter 2017.

As part of this expanded review process, we also expect to complete the review and validation of the number of potentially unauthorized accounts previously identified by the third-party consulting firm, including refinements to the practices and methodologies previously used to determine such number and to remediate sales practices related matters.

We expect that our review of the expanded time periods, which adds over three years to the initial review period of approximately four years, May 2011 to mid-2015, and our review and validation efforts for the initial review period, may lead to a significant increase in the identified number of potentially unauthorized accounts.

However, we do not expect any incremental customer remediation costs as a result of these efforts to have a significant financial impact on the company,” the company stated in it filing.

WFC closed at $52.84. Stock has a 52-week trading range of $43.55 – $59.99.

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U.S. nonfarm payrolls rose 209k in July

U.S. nonfarm payrolls rose 209k in July with earnings rising 0.3%

U.S. ADP reported private payrolls increased 178k in July. See Stockwinners.com Market Radar to read more

U.S. nonfarm payrolls rose 209k in July with earnings rising 0.3%.

The June 222k job gain was revised up to 231k, but May’s 152k increase was bumped down to 145 (for a net +2k).

There was no revision to June’s 0.2% earnings rise.

The unemployment rate was dipped to 4.3% versus 4.4%. The labor force jumped 349k following the prior 361k gain, while household employment increased 345k from 245k.

The labor force participation rate rose to 62.9% from 62.8%. The workweek was steady at 34.5. Total private payrolls increased 205k (beating ADP’s 178k).

The goods producing sector added 22k workers, with construction up 6k, and manufacturing up 16k.

Jobs in the services sector increased 183k, with the 62k gain in leisure/hospitality leading the way. Education/healthcare gains were up 54k, while business services added 49k. Government jobs rose 4k, with the Federal sector unchanged.

This is another solid report and keeps the Fed on its normalization path, but doesn’t necessarily imply a September rate hike.

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BankMutual Sold for $482 Milion

Associated Banc-Corp to acquire BankMutual for $10.38 per share

Stocks to Buy on Margin

Associated Banc-Corp (ASB) and Bank Mutual (BKMU) (“Bank Mutual”) announced that they have entered into a definitive agreement under which Bank Mutual will merge with and into Associated. Bank Mutual’s bank subsidiary will also merge with and into Associated’s bank subsidiary, Associated Bank, N.A.

The all stock transaction is valued at approximately $482M, based on Associated’s July 19 closing stock price of $24.60 per share.

Under the terms of the merger agreement, which has been unanimously approved by the boards of directors of both companies, Bank Mutual shareholders will receive 0.422 shares of Associated common stock for each share of Bank Mutual common stock.

The per common share consideration is valued at $10.38 per share based on the closing price of Associated common stock on July 19.

Subject to customary closing conditions, including regulatory approvals and approval by the Bank Mutual shareholders, the transaction is expected to close in the first quarter of 2018.

Associated expects this acquisition to be accretive to earnings per common share in 2019, excluding one-time charges, and expects the transaction to deliver strong returns on capital.

The transaction is expected to produce less than 1% tangible book value per share dilution at closing.

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Wells Fargo to Close 450 Branches

Wells Fargo targeting $2B expense reduction by year-end 2018

Wells Fargo to close 450 branches. See Stockwinners.com Market Radar for the story.

Sees FY17 effective tax rate about 29%. Expects efficiency initiatives will reduce expenses by $2B annually by year-end 2018 and that those savings will support investments in the business.

Plans to close ~450 branches in 2017-2018 to eliminate overlap and improve performance of the network; says 93 branches closed YTD 2017 through June.

Anticipates $130M in 2017 savings from gains on building dispositions and workforce optimization with an additional $20M in 2018.

Also reducing non-customer facing travel and expenses with focused efforts on virtual conferences and telepresence, as well as leveraging internal meeting spaces and services.

Wells Fargo sees auto portfolio stabilizing in 1H18 – Says seeing “slow but steady” improvement in retail business.

Expects an additional $2B in annual expense reductions by the end of 2019; these savings are projected to go to the “bottom line.”

Says had digital active customers of 27.9M, stable LQ and up 2% YoY; had 20.4M mobile active customers, up 1% LQ. Notes that mobile active customers surpassed our desktop active customers for the first time in May.

Expects to increase Q3 dividend to 39c per share from 38c per share, subject to board approval.

WFC last traded at $55.17.

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Beige Book Paints a Rosy Picture!

Fed’s Beige Book shows economic expansion across all districts

The-Beige-Book-Report showed expansion across all regions. See Stockwinners.com Market Radar

The Federal Reserve’s latest Beige Book reads, “Economic activity expanded across all twelve Federal Reserve Districts in June, with the pace of growth ranging from slight to moderate.

In addition, the majority of Districts expected modest to moderate gains in the months ahead. Consumer spending appears to be rising across a majority of Districts, led by increases in non-auto retail sales and tourism. However, many Districts noted some softening in consumer spending, particularly in auto sales which declined in half of the Districts.

Manufacturing and nonfinancial services activity continued to grow, with most Districts reporting modest to moderate gains since the last report. Loan demand was steady to increasing in most Districts.

Residential and nonresidential construction activity was flat to expanding in most Districts.

Most Districts cited low home inventory levels in certain market segments which were constraining home sales in many areas.

Agricultural conditions were mixed across the nation as moisture conditions varied considerably; several Districts continued to report weakness in dairy and some crop sectors due to low prices.

Energy activity generally improved since the last survey, particularly for oil and natural gas. Coal production remained sluggish although higher than year-ago levels.”

Employment and Wages

Employment across most of the nation maintained a modest to moderate pace of expansion, although the Atlanta and St. Louis Districts noted flat employment levels.

Labor markets tightened further for both low- and high-skilled positions, particularly in the construction and IT sectors.

Contacts across a broad range of industries reported a shortage of qualified workers which had limited hiring. Wages continued to grow at a modest to moderate pace in most Districts, and many firms attributed these wage gains to tighter labor market conditions.

Wage pressures generally trended with employment conditions, and rising wage pressures were noted among both low- and high-skilled positions.

A few Districts also reported rising costs of benefits and variable pay.

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Federal Reserve raises benchmark interest rate 25 basis points

Fed raises target interest rate to 1.00%-1.25%

Fed makes no changes to 2017, 2018 funds rate projections

 

FOMC raised rates by 25 bp

 

The Federal Reserve said in today’s statement, “Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year.

Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending has picked up in recent months, and business fixed investment has continued to expand.

Near-term Risks ‘Roughly Balanced’

The Federal Reserve said in today’s statement, “Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further.

Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.”

The median projections of Federal Reserve Board members and Federal Reserve Bank presidents under their individual assessments for the Federal Funds rate at the end of 2017 remains at 1.4% and at 2.1% for 2018, unchanged from the median projections in March.

Addendum to Policy Normalization

The Federal Reserve announced that all participants agreed to augment the Committee’s Policy Normalization Principles and Plans by providing additional details regarding the approach the FOMC intends to use to reduce the Federal Reserve’s holdings of Treasury and agency securities once normalization of the level of the federal funds rate is well under way. For payments of principal that the Federal Reserve receives from maturing Treasury securities, the Committee anticipates that the cap will be $6B per month initially and will increase in steps of $6B at three-month intervals over 12 months until it reaches $30B per month. For payments of principal that the Federal Reserve receives from its holdings of agency debt and mortgage-backed securities, the Committee anticipates that the cap will be $4B per month initially and will increase in steps of $4B at three-month intervals over 12 months until it reaches $20B per month.

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June’s Expected Rate Hike Could Be the Last One for Now

Following the May Job report, Fed Fund Rates do not forecast another rate hike

 A 25 basis point rate hike on June 14 is still widely expected. However, the outlook for a third tightening this year has become unclear

 

https://stockwinners.com/blog/

The Federal Open Market Committee #FOMC , a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation’s open market operations. FOMC has a 2-day meeting on June 13 and 14th, 2017.

A 25 basis point rate hike on June 14 is still widely expected. However, the outlook for a third tightening this year has become muddied.

Fed Policy Outlook

Despite the disappointing May employment report, and softening in inflation, the FOMC shouldn’t be derailed from increasing the funds rate band by another 25 bps this month, to put it at 1% to 1.25%.

Data show growth has improved measurably this quarter. Other than the jobs release, most other labor market indicators are reflecting a tight labor market.

Analysts are  projecting a jump to a 2.7% pace on Q2 GDP.

Additionally, the manufacturing and service sectors are still expanding.

Meanwhile, the deceleration in price pressures globally is troubling, but that is having an impact on Fed policy forecasts on Q3 and Q4.

Additionally, speculation over when the Committee will announce balance sheet normalization details is impacting, with Goldman Sachs having pushed back it’s forecast for the third 2017 hike to December from September on expectations for balance sheet details to be announced at the September 19, 20 meeting.

Analysts are still forecasting a September tightening, but if price pressures remain tepid, it may be the case the Fed delays rate action next quarter in favor of the balance sheet.

A look at the table below shows that odds of rate hike in September has been taken off the table:

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Fed Fund Rates Forecast as of June 7, 2017

There are a lot of events coming up in the next few days that may push the Financial stocks higher if FOMC modifies its language toward future policies. Note that there is an election in UK tomorrow and Comey testifies before the Congress tomorrow also.  A relief rally (short-covering) in the Financial Stocks (XLF) maybe in the cards.

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