US to Raise Interest Rates This Year

And the FOMC’s largely upbeat policy statement suggests the economy is on track to meet those conditions. However, the latest statements from the US Federal Reserve also signal that a US interest rate hike is coming closer, hence giving rise to a stronger US dollar at the expense of most global currencies and the gold price.

The Fed said it still expects inflation to rise gradually toward its 2% target.

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For this to happen, however, we’re going to need to see signs of wage growth and continued improvement in the labour market over the next month.

Most economists forecast that U.S. economic growth will pick up after a lacklustre first half and that the Fed will begin tightening monetary policy in September, according to a Reuters poll published last week.

Ahead of Thursday’s Q2 GDP report, Michelle Meyer at Bank of America Merrill Lynch said the US economy was facing a “moment of truth”.

“Yeah, the economy is improving, but they are not really saying that the economy is taking off here”, said Tom di Galoma, head of rates trading at ED&F Man Capital.

“The slide that we’ve seen last week showed investors were already pricing in the effect of the first rate hike whether it’s September or December”. The statement “continues to prepare markets for a September rate lift-off”, she said.

The statement was approved on a 10-0 vote, marking the fifth straight time it has been unanimous. This month Bank of England Governor Mark Carney indicated that rates are likely to start climbing from record lows “around the turn of this year”. Those efforts are complicated by bond-market inflation expectations, which are the lowest since January as prices for commodities including oil have plunged amid turmoil in China’s stock market.

In determining how long to maintain this target range, the Committee will assess progress-both realized and expected toward its objectives of maximum employment and 2 percent inflation.

A few gauges of the job market remain less than healthy. Pay growth remains generally sluggish, for example, and many people are working part time because they can’t find full-time jobs.

With no meeting in August, it will have two months of data to analyse before deciding whether to raise rates from their emergency levels in September. The central bank has another meeting scheduled for December.

It would require an unexpected upside data surprise for the Fed to hike rates in September.

Rising salary costs could generate more inflation the lack of which the Fed has highlighted as a reason to be cautious on rates.

Ryan Wang, an economist at HSBC, said: “The decline in inflation is mostly a result of the steep drop in oil prices over the past year”.