Federal Reserve

US Fed signals strongly interest rate hike on the table in June

PUBLISHED : Thursday, 19 May, 2016, 3:31am
UPDATED : Monday, 30 May, 2016, 2:19pm

US Federal Reserve officials said it would be appropriate to raise interest rates in June if economic data points to stronger second-quarter growth as well as firming inflation and employment, according to minutes from their policy meeting last month.

That view, expressed by most of the Fed’s policy-setting committee at the April 26-27 meeting, suggests the US central bank is closer to lifting rates again than Wall Street had expected.

The policymakers said recent data made them more confident inflation was rising toward the Fed’s 2 per cent target, and that they were less concerned about a global economic slowdown, according to the minutes, which were released on Wednesday.

“Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labour markets continued to strengthen, and inflation making progress toward the committee’s 2 per cent objective, then it likely would be appropriate for the committee to increase the target range for the federal funds rate in June,” according to the minutes.

Prices for futures contracts on the Fed’s benchmark overnight lending rate implied that investors saw a 34 per cent chance of a rate increase next month, up from 19 per cent shortly before the release of the minutes, according to CME Group.

US stocks pared gains and the dollar extended gains against a basket of currencies after the minutes were released. Treasury yields rose, with the yield on 30-year U.S. government debt rising to a two-week high.

“They are ready to pull the trigger on a rate increase in June,” said Jack Ablin, chief investment officer at BMO Private Bank in Chicago.

Some policymakers at the April meeting expressed concern about a slowdown in US economic growth during the first quarter, when gross domestic product expanded at an annual rate of 0.5 per cent, a two-year low.

But others argued that ongoing robust job growth suggested the economy had not gone off the track and that the growth data could be flawed.

“Most pointed to the steady improvement in the labour market as an indicator that the underlying pace of economic activity had likely not deteriorated,” according to the minutes.

Some policymakers said they were concerned financial markets could be roiled by a possible British exit from the European Union in a vote next month or by China’s exchange rate policies.

At its April meeting, the Fed kept its target overnight interest rate in a range of 0.25 per cent to 0.50 per cent. It hiked rates in December for the first time in nearly a decade.

A global equities sell-off and the tightening of financial markets earlier this year largely due to concerns of a slowdown in China prompted the Fed in March to dial back rate increase expectations for the year.

Even so, the Fed signalled at that time that it would likely lift rates twice this year. Investors have been betting on just one hike.