Fed to stay dovish in new rates regime

Since the last FOMC meeting in April the US economy is looking healthier in terms of employment, consumer spending  and wages.

But is that enough for the Fed to shift to a rates hike mode? Will there be a second hike by the end of the year?

For analysts at Barclays:

“We see the risk that the Fed could convey a dovish message, as it would most likely be paring back growth expectations for 2015 and may want to lean against the recent tightening in global financial conditions. Core PCE inflation y/y has also declined, to 1.2% from 1.3% in March.  At the March meeting, a majority at the Fed expected two hikes in 2015. While this modal outcome should to remain unchanged, the 2015 “dots” are again likely to show a drift lower.”

“The market is pricing in a roughly 65% chance of the Fed’s hiking once by the September meeting (as Oct 15 FF futures are trading 13bp above spot vs. 20bp if the Fed were to hike once). While the front end is still vulnerable to the pricing of the hiking cycle (should inflation pick up), long tenors look attractive from a risk-reward perspective, given the high level of forward yields. We maintain our long 10y US Treasuries recommendation.”