US Federal Reserve gears up for interest rate hike later this year

18th June 2015


The US Federal Reserve looks set to push the button on interest rates and raise the cost of borrowing later this in 2015.

Such a move would mark the first time that the central bank has increased the base rate since it was slashed to near zero during the financial crisis.

At its latest meeting the Federal Reserve voted unanimously to keep the so-called benchmark federal funds rate unchanged at zero but its positive economic outlook suggested it is setting up for a rate increase later in 2015.

In a press conference on Wednesday the Federal Reserve boss acknowledged that the majority of policy-makers “are anticipating a rate increase this year”, but she reiterated that when they do start to tighten monetary policy, they would do so gradually.

While Fed officials revised down their projections for economic growth this year from between 2.3% and 2.7% to around 1.8% to 2%, Paul Ashworth chief US economist at Capital Economics noted the revision was “balanced by a much more upbeat assessment of the economy’s performance in the accompanying statement, suggesting that it mainly reflects the unexpected weakness in the first quarter”.

Commenting on the latest rhetoric from the US central bank, Iain Stealey manager of the JP Morgan Global Bond Opportunities fund said: “As expected, the Federal Open Market Committee’s June statement on monetary policy and the accompanying SEPs (Summary of Economic Projections) signaled a subtle change from that of April, suggesting that we are on track for a rate hike this year. The Committee improved its economic outlook, but did not change its tone regarding inflation and inflation expectations. It also reiterated that the timing of the initial hike remains data-dependent.”

In line with the Fed’s guidance, over the near term Stealey expects two rate hikes in 2015 – in September and December – with a year-end fed funds rate of 0.75%.

“We expect an additional four rate hikes in 2016 to 1.75% by year end. With that will come continued moderate volatility,” he added.

“Over the medium/longer term, we expect increased volatility as the market adjusts away from forward rate guidance, but that volatility will eventually be dampened by liquidity from central banks.”

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