Going into 2016, the US Federal Reserve had a battle plan that called for four 0.25% hikes to the interest rate over the course of the year, in a bid to restore interest levels to near their historical average. Rates had been on hold since 2006. As the saying goes, no plan ever survives contact with the enemy.
Concerns over a weak oil price and the slowing of the world’s second largest economy, China, meant that global stock markets fell heavily in early 2016, derailing the Fed’s plans to see interest rates move higher since it could have exacerbated the problem. With that said, US job growth has been fairly robust over the first five months of the year with only the most recent data disappointing. It has always been clear that the Fed will raise rates when it believes the market, inflation and employment conditions permit.
The case for a June hike seems to have been strengthened by the release of minutes from the latest meeting of the Fed’s Open Market Committee (FOMC). The minutes showed that a June rise was being actively considered during the April 26-27 meeting; many analysts had expected a July date to be more likely.
The Fed will remain cautious about external, global factors before taking the decision to increase rates. For this reason, some analysts think that the Bank will wait for the outcome of the UK referendum on remaining within the EU which will occur after the next FOMC meeting. No doubt, such caution will be seen as further evidence of the global campaign of fear by ardent “Brexiteers” in the UK.
The latest FOMC minutes suggest that the Bank that US inflation will move upwards towards its 2% target as the year continues. The US Consumer Price Index rose 0.4% last month due to higher energy costs, government data reveals. Whilst Q1 growth was a modest 0.5% (the weakest growth seen for two years), the FOMC believes that Q2 will provide stronger growth with increased employment prospects.