Fed Rate Hike Expectations: What Four Big Banks Are Saying

Is a Fed rate hike looming in September? What will the impact be to the equities market? Unfortunately for investors, the lack of full clarity remains an overhang and major source of concern.

Four major banks attempt to offer clarity and their analysis.

JPMorgan: Fed More Dovish Than Expected

Adam Crisafulli of JPMorgan commented in a note that the Fed minutes were "more dovish than anticipated," making a September rate hike "a bit less likely."

"The fact we are in a vacuum (both information/news and liquidity) isn't helping equities as the existing sentiments and narratives are allowed to promulgate uncontested," Crisafulli wrote. "The atmosphere in general is growing very gloomy as investors focus on growth (Europe backtracked in Q2, Emerging Markets are collapsing, and the US will face a big inventory headwind in H2) and use the ongoing commodity collapse as justification for this view (without much considering for the growing supply imbalance)."

Crisafulli clarified that the Fed's tone "by no means rule out" a rate hike in September. He added that moving the FF range from 0-0.25 percent to 0.25-0.5 percent would "hardly be a headwind" to risk assets. In fact, stocks are "eager" to have the process commence and would "welcome" a hike in September.

On the other hand, Crisafulli argued that a deferral is "increasingly a headwind" as it "saps" liquidity, risks fueling asset prices imbalances, and might force the Fed into a more "rapid" tightening policy in the future.

Bank Of America: Minutes Were ‘So Dovish'

Michael Hanson of Bank of America commented in a note that the Fed's minutes "were so dovish that they appear to better reflect the post-meeting deflationary developments in August."

Hanson continued that the sell-off in the market on Wednesday results in a September liftoff probability to be lowered to 30 percent from around 50 percent. The analyst pointed out that Fed officials indicated they are convinced the labor market soon would be (or are already) good enough to initiate a hike, but abstained when it came to being "reasonably confident" on the improving inflation outlook.

Hanson also noted that the Committee seemed "much more evenly divided" than earlier minutes and speeches might have suggested.

"The FOMC has not ruled out September, but now the incoming data need to support a hike rather than merely not strongly argue against it," the analyst concluded. "The July minutes have significantly increased the uncertainty going into the next FOMC meeting, and leave us with a very close call for September liftoff."

Credit Suisse: Minutes ‘Hint At Caution'

Praveen Korapaty of Credit Suisse commented in a note that the Fed minutes did not suggest an "urgency" to hike rates. On the other hand, the Fed seems to "genuinely" want to get away from zero, and expectations are it should do so when "the opportunity presents itself."

Korapaty pointed out that the minutes were from a meeting that occurred before China devalued its currency. Since then, the Chinese equity suffered "serious" reverses, oil has dropped around 11.5 percent and 5y5y TIPS breakevens have sold off 16 basis points.

"Hardly the backdrop to instill confidence for those participants that had highlighted ‘risks of further declines in oil and commodity prices' who are hoping to see evidence to instill ‘reasonable confidence that inflation would move back to two percent over the medium term,'" Korapaty wrote.

Finally, the analyst noted that the Fed will be "equipped" with more information before a September decision which includes another jobs report, GDP (Q2 revision) and inflation data. While the probability of a hike in September "diminished in likelihood," a hike at some point this year is "still highly likely."

Citi: Minutes Did Not Present A New Dovish Posture

William Lee of Citi commented in a note that the Fed minutes "hinted in passing" that there were risks to financial stability from a delay in policy firming.

"In the July FOMC minutes, their discussion expanded on this issue, which could only favor an earlier move," Lee wrote. "Most importantly, the July FOMC discussion highlighted the potential difficulties in identifying and managing the emergence of new risks resulting from prolonged low rates. The increased prominence of financial stability considerations in the FOMC discussion is a very hawkish signal that markets apparently ignored with the release of the July minutes."

Lee also noted that the minutes imply that Committee members did not allow foreign developments to "sway their baseline assessment" over the timing and pace of "rate normalization." As such, it will take a "bunker buster" to stop the Fed from raising rates in September.

In fact, if the Fed waits until October or December to raise rates, Chair Janet Yellen would be asked what new developments occurred since September that had changed her mind. This marks a question "she cannot answer."