US Fed 'edging' towards a rate hike

US Fed 'edging' towards a rate hike

The US Federal Reserve is setting the scene for a second interest rate hike in the coming months, with US money markets pricing in a 28 per cent chance of a move in June, says AMP Capital.

After five months of "a lot of noise but inaction", the US Federal Reserve ('the Fed') is moving towards another rate hike with the June meeting a distinct possibility, according to AMP Capital chief economist Shane Oliver.

US money markets have seen the chances of a June hike increase from close to zero to 28 per cent on Friday, Mr Oliver said.

But while a June increase in the official US interest rate is now a "close call" a July or September hike is more likely for a few reasons, he said.

"[First,] the Brexit vote will take place just one week after the June meeting and several Fed officials have indicated that the Fed will consider that," Mr Oliver said.

"Fed voting members appear to be more cautious than the full range of Fed meeting participants who include non-voting regional presidents who tend to be more hawkish.

"[Finally,] the Fed will likely need more time to assess recent data releases which have only just started to improve again. So at this stage our base case is for a July move," Mr Oliver said.

More broadly, AMP Capital expects that constrained global growth will result in "very gradual" US Fed hikes.

"The risk that the US dollar will start to surge higher again creating renewed weakness in commodity prices, Renminbi deprecation, pressure on emerging countries and a brake on US growth all acting to constrain by how much and how quickly the Fed can hike," Mr Oliver said.

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