Fed Signals Rate Hike in June on Conditions of Economic Improvement

Fed Signals Rate Hike in June on Conditions of Economic Improvement

19 May 2016, 08:18
Roberto Jacobs

Fed Signals Rate Hike in June on Conditions of Economic Improvement

The minutes of the April 26-27 Federal Reserve Open Market Committee Wednesday signaled markets of a possible rate hike in June, if the US economy good track of improvement. Investors and creditors have been warned of such an instance, if the economy keeps growing.

Recent perception that the Fed would not chip for a rate hike anytime soon, has been waned off by a cluster of recent impressive economic data, comments by the Fed officials and the latest release by the Central Bank on the deliberations of its last policy, the Wednesday afternoon release of the FOMC minutes revealed.

"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 [Fed’s] 2% objective, then it likely would be appropriate for the [Fed] to increase the target range for the Federal funds rate in June," the Minutes mentioned.

Traders in the futures market have already started guessing on the probability of a June 14-15 rate hike. Traders are now 34 pct probable, compared to 4 pct prior to the minutes were released. The Fed could still wait to move instead at its meetings in July or September. By late Wednesday, traders put a 56 pct probability on a move by July, up from 20 pct on Tuesday.

The shift in expectations looped markets for some time. The Dow Jones Industrial Average dropped by more than 180 points just after the release of the minutes, and then rallied late into the day to end on a flat note.

Yields on 10-year Treasury notes rose 0.123 ppt to 1.882 pct, while the prices on these notes, which move inversely to the yield, dropped. The value of the dollar rose 0.8 pct against a broad basket of currencies.

“The markets got a little out of whack and the Fed is just nudging them back to where they are,” said John Canally, Chief Economic Strategist, LPL Financial.

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