Fed to raise rates despite sluggish economic data

The central bank left the target for the federal funds rate, the interest rate offered to other banks, between 0.75 and one per cent at the last meeting in May, with a 25 basis points move to an upper bound of 1.25 per cent now on the cards.

The focus is on whether the Fed is looking at three or four rate hikes this year, according to Argonaut Securities analyst Helen Lau.

Economists believe the Fed will pencil in one more rate hike this year and three rate hikes in 2018, bringing the federal funds rate up to 2.1% at the end of 2018.

"These rate hikes are not costless". They will also prepare an economic forecast. The lowered rate-hike expectations since mid-March has helped to revive a bond market rocked by worries about a more aggressive Fed and higher inflation under President Donald Trump's policies.

Inflation moved even further from the Fed's two percent target in April, with the Fed's preferred inflation measure at 1.7 percent for the latest 12 months.

The Fed now holds $2.5 trillion of U.S. Treasurys and $1.8 trillion of mortgage-backed securities, a legacy of. A Reuters poll released on Friday showed analysts' median forecast on USA core PCE fell to 1.5-1.7 percent per quarter in 2017 from 1.7-1.8 percent in a prior poll conducted in May. Overall, more respondents viewed those risks as roughly balanced, compared with two months ago when they anxious more that higher-than-expected growth and inflation might disrupt the Fed's outlook.In response to a separate question, economists indicated the biggest risk to the Fed's economic outlook lay in the possibility that loose monetary policy might fuel asset bubbles that threaten financial stability. But the consensus view among Fed officials has been that inflation would reach 2 percent in the medium term. In the $13.9 trillion TIPS market, the yield gap between 10-year TIPS and benchmark 10-year Treasuries, a gauge of investors' inflation expectations, has steadily narrowed since mid-March to 1.81 percent on Friday.

Indian shares fell on Monday as investors booked profits in recent outperformers including lenders ahead of inflation data due later in the day, while sentiment was cautious ahead of the U.S. Investors are not upbeat about inflation outside the United States either.

But data showed some investors remain confident the setback in US inflation is temporary and price growth would accelerate later this year.

The data is unlikely to change the outcome for a rate hike in June, but softer than expected data could put a September rate hike at risk and potentially change the tone of the Fed's policy statement, Seth Carpenter, economist at UBS.

We at FxWirePro suspect that while Fed will hike in this week, the decision will not be unanimous.

  • Zachary Reyes