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US Fed edges closer to interest rate rise

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Yesterday’s meeting of the Federal Reserve has made an interest rate hike in September more likely, say experts.

In a statement following the Federal Open Market Committee meeting, the reserve said “some further improvement” was needed in the labour market, where previously it had said just “further improvement” was needed.

“The addition of the word ‘some’ may appear minor, but the Fed doesn’t add words willy-nilly to the FOMC statement,” says Michael Feroli, chief US economist at JPMorgan Chase.

However, the Fed reiterated its need to see inflation expectations return to 2 per cent. There are concerns that low oil prices and the strong dollar could be a drag on inflation.

“In determining how long to maintain this target range, the committee will assess progress – both realised and expected – toward its objectives of maximum employment and 2 per cent inflation,” the committee said in a statement.

“The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term,” the statement added.

Many are now expecting a rate hike at the next meeting, in September, instead of later in the year.

“It leaves the door wide open to a September liftoff, but still retains the optionality to delay hiking if the jobs reports disappoint between now and mid-September,” says Feroli.

While much of the effect of a rate rise has been priced into markets, following clear communication from the Fed, there is likely to be some volatility when the rise actually happens, says Nick Gartside, fund manager of the JP Morgan Global Bond Opportunities Fund.

“Over the near term, we still expect the Fed to raise rates in September. By the end of 2016, we expect the Fed funds rate to reach 1.75 per cent. Over the medium term, we anticipate increased volatility as the market adjusts away from forward rate guidance, but that volatility will be balanced by liquidity from central banks,” says Gartside.

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