U.S. Dollar In Trouble As Fed Window May Be Closed Until December

The May US labor market was the exact type of jobs report that could that could upend Federal Reserve policymakers' hopes of raising rates in June. Remember in January when the FOMC was suggesting it was still going to raise rates four times this year? That was an odd notion then, and it outright laughable now.

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Before Friday's labor market report, the Fed funds futures contract was implying around a 22% chance of a rate hike in June. Today, it's pricing just 4%. Alas, as Robert Burns wrote in 1785 in "To a Mouse,"

The best-laid schemes o' mice an 'men

Gang aft agley,

Markets have quickly scaled back expectations of any further tightening this year, with the only rate hike projected to come in December (58.5% chance). Still, that's unconvincing, considering that the Fed has never raised rates unless the Fed funds futures contract has implied at least a 60% chance of hiking rates in the front month. Markets themselves aren't fully convinced that another hike is coming this year.

This doubt about further policy normalization by the Fed in 2016 is well-founded. We continually express our disbelief that the Fed (or the ECB for that matter) would announce a significant change to policy without concurrently releasing new staff projections and letting Fed Chair Janet Yellen hold a press conference to try and soothe markets.

In an effort to become more transparent, central banks have become more predictable. Skipping ahead past June, September is the next time the Fed would have a staff projections update and press conference, but it seems highly unlikely that any policy tightening will be done on the doorstep of what's already a vicious US Presidential election.