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What to Expect from July’s FOMC Meeting

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July’s FOMC meeting in focus

The two-day July FOMC (Federal Open Market Committee) meeting ends today. The FOMC is widely expected to leave interest rates unchanged, as policymakers will assess the impact of the Brexit vote on June 24. Treasury yields (TLT) (IEF) dropped to record lows after the Brexit vote. Market participants will be closely watching the meeting for clues about the next rate hike.

The Fed (Federal Reserve) raised its benchmark federal funds rate in December 2015 to the range of 0.25%–0.5% and has held it steady since then due to an uncertain global economic outlook and turbulence in the financial markets.

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Policymakers sound more upbeat about raising rates by year’s end

As reported in the Wall Street Journal, Atlanta Fed President Dennis Lockhart believes the Fed is likely to raise rates this year. He stated, “I wouldn’t rule out as many as two,” referring to the number of rate hikes in 2016. He added, “Markets had been quite orderly since the Brexit vote and turbulence leading up to and right after the British vote does not seem to have caused direct harm to the country’s economy.”

As also reported in the Wall Street Journal, Robert Kaplan, president of the Federal Reserve Bank of Dallas, said in an interview at the Official Monetary and Financial Institutions Forum, “We should be looking toward removing accommodation.”

Similarly, Loretta Mester, president of the Cleveland Fed, said in a recent interview with the Wall Street Journal, “I think the underlying fundamentals remain very solid for the US economy.”

Robust economic data make the case for a rate hike in 2016

The strong consumer inflation and retail sales (WMT) (TGT) data, along with improvement in US industrial activity (CAT), indicate that the US economy is gaining strength. Further, robust jobs data and a rebound in 2Q16 GDP may give confidence to policymakers to tighten monetary policy in the coming months.

In the next article in this series, we’ll look at how the ten-year TIPS (Treasury inflation-protected securities) auction fared last week.

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