The relatively bumpy start to 2016 and unspectacular numbers being generated by the US domestic economy had led many to believe the second rate hike of this new cycle may not happen until late in 2016 at the earliest.
Economic research firm Fathom Consulting sees summer rate rise as likely now however, and even a third rise before the year is out.
“The hawkish tone in the minutes of the FOMC’s meeting in April leads us to believe that the Fed is now likely to raise the federal funds rate by July, and probably again in December,” the Fathom team said. “This view assumes that the UK votes to remain in the EU, and that Hillary Clinton wins November’s US presidential election. Previously, we had anticipated only one increase in the federal funds rate this year. Our change owes more to the new information about the Fed’s reaction function – revealed in the minutes – than it does to any change in our view on strength of the US economy.”
CEO at Sun Global Investments Mihir Kapadia noted that the Fed’s more hawkish tone has spooked markets a touch.
“Markets are battening down the hatches for an almost certain Fed rate rise, as the strength of the labour market, improving economic conditions, better inflation and a decrease in global risks makes it more likely that the US will move quickly to normalise its monetary policy,” he said. “The probability of the latter has increased after the release of the Fed’s FOMC meeting yesterday.”
On the back of the news, the dollar rose and continued its recent ascent, while US government bonds remained weak,” Kapadia added. “The dollar’s strong showing also permeated to crude oil prices, which saw a marked dip this morning owing to elevated US crude inventories and swelling output from Iran to Asia and Europe.”
