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Over the past several weeks investors had been increasing their bets that the U.S. Federal Reserve would raise its policy rate in the near future, with the odds of a Fed rate hike in July peaking at about 58% last week.
This speculation was fueled by increasingly hawkish comments from several Fed members who warned that the improving U.S. economy would soon be ready for another round of monetary-policy tightening.
I had been sceptical about whether the Fed would actually follow through on its warnings because we have seen many recent examples of Fed talk not translating into action. And I don’t think it was a coincidence that the Fed’s rate-hike warnings grew louder at a time when the bond-futures market was pricing in odds of no Fed rate increases until early 2017.
Over the past several years the Fed has repeatedly used hawkish rhetoric to keep investors from becoming complacent whenever the lower-for-longer view started to really sink in. For my money, this latest rate-rise talk was just the most recent example of the Fed using the power of its words to keep moral hazard risks at bay.
That said, we’ll never know for sure because the latest U.S. employment report, released last Friday, was so bad that investors quickly reversed course and lowered the odds of a Fed rate hike in July all the way down to 31% in less than a day.
Here are the highlights from the latest U.S. employment report, which was about as close to a stinker all round as we have seen in a long time: