An interview with NY Fed President Dudley (printed in the FT (se link in attachment) on Sunday but conducted on Friday ahead of the announcement of the Greek referendum) gives a good indication in our view of what to expect from the Fed in reaction to the Greek issue (for an update on Greece, see Grexit - what if? Greek referendum changes the game) .
The starting point seems to be that the Fed is ready to hike in September given the positive run of data releases recently. Asked about the probability of a September hike, Dudley stated that If the data continue to evolve in the way they have, I think September is very much in play.
This was followed by a Q&A on the Greek issue. Here it was clear that the Fed is focusing on financial conditions in a broad sense and the impact on the European economy from Greece. Contingent on what happens over the coming weeks or months, the Fed will monitor developments and react accordingly. Our base case is a September rate hike, based on our expectation of solid economic data in the coming months, but contingent on what happens over the coming weeks, the Fed could very well choose to push the first rate hike further into the future.
As Dudley highlighted, it is the development in financial conditions that we have to monitor. Hence a significant tightening would likely prompt the Fed to keep their hands off the trigger. This tightening could come via the currency, wider credit spreads or lower stock markets . So far however, the financial market reaction has been relatively modest.
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