The Federal Reserve, the world’s most powerful central bank, is set to raise interest rates overnight and signal that another rise is planned for later in 2017. The headline looks almost certain to be another 25 basis point increase to 1.25%. A third hike in 7 months shows that the US monetary policy committee is well and truly awake after lying dormant for the whole of 2016.
As with the last move from the Fed the FX market began to price the hike in so analysts do not expect too much strength from the USD based on this alone. What is likely to cause ripples through the market is the prognosis from Chair Yellen regarding future rate rises this year and next. The sentiment around this is polarized.
The position to base any predictions stems from the ‘dot plot’ graph which was last updated by the Fed in March. This anticipated a further 2 25bp increases in 2017 and 3 in 2018 leaving the US with a policy set at 3% by Q1 2019. Markets, however remain unconvinced that this is a realistic target so much so that current predictions expect rates to rise only once more by the end of 2018.
The likelihood of the Fed conceding to market analysts is uncertain at present. Looking at the hard data, the jobless claims and fall in unemployment rate drives the assertion for continued hikes. However, inflation has not yet surpassed the level necessary for central bank intervention. CPI has fallen below 2% for the first time since 2015 with modest rises on the horizon.
Should the Fed continue to carry on its projected path expect USD strength, however if the sentiment is cautious and monetary policy tightening is suspended the USD will inevitably be under pressure.