Trading on forex – what would a rate rise do for the dollar?

Just how likely is the Federal Reserve to raise interest rates this year? After last December’s quarter-point increase, there has been a seesaw in expectations over when and if the US central bank will continue the tightening cycle.

Federal_Reserve

Hawks Circle

 

Markets had all but priced out the likelihood of rates rising before December, but a couple of hawkish comments from two Fed policymakers has set the cat among the doves and raised the prospect that rates could rise when the FOMC next meets in September.

New York Fed president William Dudley told Fox that it may soon be “appropriate” to raise interest rates further.

“The labour market is getting tighter and we’re starting to see signs of wage gains starting to accelerate, so I think we’re getting closer to that point in time when it will be appropriate to actually raise short-term rates again,” he added.

Atlanta Fed president Dennis Lockhart went a step further, suggesting that the US economy is now strong enough to cope with two 25-basis-point hikes this year.

“I would not rule out September. If the meeting were today I think the economic data would justify a serious discussion. It’s conceivable we could have two rate increases this year,” he said in a speech to the Rotary Club of Knoxville, Tennessee.

Lockhart said he is upbeat about the prospects for the US economy in the second half of 2016 and 2017, noting that the early indicators show a big rebound in the third quarter.

FOMC meeting minutes

 

The latest minutes from the Federal Open Market Committee (FOMC) showed some policymakers thought "economic conditions would soon warrant taking another step", while others believe more data is required.

Overall the minutes show members are happy about US growth but would like to see the current pace of recovery being sustained.

Inflation is still not quite firing. Prices have been growing by 1.6% since the end of the first quarter, just below the Fed’s preferred 2% target. "A couple of members preferred also to wait for more evidence that inflation would rise to 2% on a sustained basis," the FOMC statement said.

Key to the upbeat mood is the jobs market, which has shown signs of being in robust health over the summer. The last two months have produced some standout results, with employers adding over half million jobs in July and August (287,000 and 255,000 respectively).

“Participants agreed that the information received over the intermeeting period indicated that the labour market had strengthened and that economic activity had been expanding at a moderate rate. Job gains were strong in June following weak growth in May,” the statement read.

Will the Fed pull the trigger in September? The non-farm payrolls figures released on September 2nd should prove instructive. Another blowout round of job creation could tip the balance, although it’s unclear whether the Fed would risk upsetting financial markets just before US elections.