Roughly 287,000 jobs were created in June, leading many to wonder if a July interest rate hike was coming.
But there is very little chance of seeing a rate hike in July. In fact, CME Group's FedWatch tool suggests the markets believe there is a 0% chance of a rate hike in July.
However, there is still a chance that we'll see one by the end of 2016.
Before we get into the odds of a rate hike in 2016, here's what has been holding back interest rate hikes the last several months...
In May, the United States only added 38,000 jobs. That was well below expectations of 175,000, and the Fed called it an "anomaly." The Fed partially blamed Verizon Communications Inc. (NYSE: VZ) because of a workers strike. It also blamed unseasonably warm weather allowing more work to be done during the winter, creating less need for spring-time construction workers.
Plus, the Fed didn't want to raise rates and add economic uncertainty ahead of the Brexit vote.
Britain has yet to leave the European Union, but the vote to leave has already had a significant impact:
- Prime Minster David Cameron resigned.
- The value of the pound hit all-time lows.
- Other countries like Italy, France, Sweden, Belgium, and Poland have all shown interest in holding referendums to leave the EU.
- JPMorgan Chase & Co. (NYSE: JPM) CEO Jamie Dimon said the bank may have to move thousands of staff out of Britain if it lost the automatic right to sell financial services to the EU.
- The number of people visiting British shops fell 3.4% in the 10 days following the Brexit vote, according to retail data company Springboard.
Even though there is still economic uncertainty, the Fed seems dead set on raising interest rates. And here's when the markets think it will happen...
When the Markets Believe an Interest Rate Hike Will Take Place
Two other factors creating economic uncertainty have been volatile oil prices and the slowing of the Chinese economy.
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Because of these issues, the Fed didn't raise interest rates in June. But the Fed has maintained it still wants two interest rate hikes in 2016.
We already know the odds of an interest rate hike in July are very low. But what's surprising is the markets aren't buying the Fed's statements that it wants two interest rate hikes in 2016.
During the next FOMC meetings in September and November, 88% of investors believe interest rates will remain the same. Even in December, 67% of investors still feel rates are going to be exactly the same.
Investors also overwhelmingly believe rates will stay the same from February 2017 to May 2017. We only start to see those odds change in June 2017, when 53.1% of investors believe rates will stay the same.
So while the Fed may keep telling investors it wants to raise rates, the markets aren't buying it.
The Bottom Line: The Fed wants two more interest rate hikes, but the economic uncertainty caused by the Brexit vote, volatile oil prices, and the slowing of the Chinese economy have the Fed on its heels. Investors overwhelmingly believe the Fed won't raise interest rates until June 2017.
Jack Delaney is an associate editor for Money Morning. You can follow him on Twitter and follow Money Morning on Facebook.
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