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When will the next U.S. Federal Reserve interest rate hike happen? That's the question investors are asking this week after the FOMC minutes from the July 26-27 meeting were released yesterday (Wednesday).
The FOMC meeting minutes suggested an interest rate increase is possible as early as September. But with voting members decidedly divided, a hike next month looks highly unlikely.
The Fed didn't move rates during the July meeting, but officials said that some of the short-term risks to the economy had dissipated. That left the door open for a Federal Reserve interest rate hike in 2016.
While some Fed members believe an interest rate hike is needed soon, the general agreement among Fed officials is that more data is needed before such a move.
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The FOMC meeting minutes showed members were bullish about the U.S. economy and job market. The pace of hiring will be closely watched going forward, though.
Other Fed officials believe the U.S. job market has fully recovered and that we are looking at full employment. The unemployment rate currently sits at 4.9%. That's down from the financial crisis peak of 10% in October 2009.
The Fed minutes also revealed several officials are still not confident that inflation will rise to the desired 2% target. Inflation has been running under 2% for the last four years.
But the minutes also showed that some of the concerns that had prevented a Federal Reserve interest rate hike from happening so far this year have waned. They include the swift recovery of financial markets following the UK's June 23 vote to leave the European Union, as well as strong job gains in June.
After parsing through the FOMC minutes, here's when investors can expect to see the next Federal Reserve interest rate hike...
Here's When We'll See a Federal Reserve Interest Rate Hike
The last Federal Reserve interest rate hike happened in December 2015. At the time, policymakers penciled in four interest rate hikes for 2016.
Yet a volatile start to the year for global equity markets, oil prices, and worries of a slowdown in China gave the Fed reason to pause. As the year progressed, fears of a global recession and Brexit concerns kept the Fed's interest rate pace on hold.
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Now, markets are entering the historically challenging month of September. Since the Dow Jones Industrial Average was created in 1896, September is the worst month on average for stocks by far. That's according to data from the Stock Trader's Almanac. The Dow has experienced an average loss of 1.06% in September. That compared to an average gain of 0.75% across the 11 other months.
So how the market performs ahead of the next FOMC meeting on Sept. 20 will be key.
While policymakers have left the door open for a rate increase in September, the odds are slim. According to the CME's FedWatch tool, traders say there is an 82% chance the Fed won't hike rates in September.
After September, the next FOMC meeting will happen on Nov. 1. The overwhelming consensus is that the Fed will not raise interest rates so close to the presidential election. This year's election is one of the most contentious in recent memory. There is an 80% chance the Federal Reserve interest rate will remain unchanged at this meeting.
But the December FOMC meeting is when we could see the next Federal Reserve interest rate hike...
The last Fed meeting of 2016 starts on Dec. 13. The likelihood of an interest rate increase in December is 49.7%. So a Federal Reserve interest rate hike isn't guaranteed then, but that's our best bet.
There is precedent for the Fed to hold off in December, though. When the Fed raised rates in December 2015, stocks dropped 10% in the following six weeks.
The next clue on interest rates will come next week. Fed Chair Janet Yellen will speak at a conference in Jackson Hole, Wyoming, on Aug. 26. The conference is a gathering of global central bankers and has been the venue for major Fed policy announcements.
Stay tuned to Money Morning for more updates on the Federal Reserve interest rate policy.
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- CME Group: FedWatch Tool
- Reuters: World Stocks Rise, Dollar Weakens on Divided Fed
- Business Insider: Here's Everything the Fed Is Worried About Right Now