Thursday, May 19, 2016

US Federal Reserve surprises with signal for a June rate rise

The US Federal Reserve has signalled that a June rate rise is firmly on the agenda if economic conditions continue to improve.

In the minutes from the Fed's April meeting where rates were left steady at between 0.25 and 0.5 percent, officials say a hike would be “appropriate” if key indicators on inflation and employment stay on a positive track.

"Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen and inflation making progress toward the committee's 2 percent objective, then it likely would be appropriate for the committee to increase the target range for the federal funds rate in June," the minutes say.

But the minutes also show that Fed members remain divided on whether those critical conditions will be met.

"Participants expressed a range of views about the likelihood that incoming information would make it appropriate to adjust the stance of policy at the time of the next meeting."

The hawkish tone of the minutes surprised many Fed watchers who had pushed expectations for a US rate rise to later in the year.

Listen to this morning's report from the ABC's Rebecca Hyam

While the Fed awaits better news on the US economy, officials are cautious about global developments that have the potential to trigger volatility.

The minutes warn that global markets could be "sensitive" to the referendum on Britain's membership of the European which occurs a week before the Fed's June meeting.

The Fed also remains concerned about China and "unanticipated developments" associated the China's management of its exchange rate.

US dollar surges after Federal Reserve Minutes      Source: Bloomberg

National Australia Bank senior economist David de Garis agrees the likelihood of a June rate rise comes despite earlier comments from Federal Reserve chair Janet Yellen that the federal funds rate would only be increased gradually.

In a note to clients, Mr de Garis says despite the Brexit caution "the Fed is still seriously considering enacting some further gradual removal of monetary accommodation."

The US dollar rose sharply after the release of the Fed minutes, pushing the Australian currency as low as 72.15 US cents.

The Federal Reserve hiked interest rates in December ending a extensive period of emergency support in the wake of the Lehman Brothers collapse in 2008.

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