U.S. Fed likely to hike rates again in H2 2018, may raise rates thrice in 2019

The U.S. Federal Reserve Open Market Committee had unanimously voted in June to hike its key policy interest rate to 1.75 to 2 percent, in line with market expectations. This was the second rise in 2018 and the seventh since the Fed began hiking rates in December 2015. The question is how much further interest rates are expected to rise. The possibility of further above trend economic growth and a rise in ‘core’ inflation point to further rises in the near-term.

That is the hint that the U.S. Fed is giving as its latest June post-meeting policy statement noted that “further” rises are possible, noted Lloyds Bank in a research report. The Committee expects to continue to hike interest rates toward, and then beyond, what it regards as the long-term equilibrium rate of 2.75 percent to 3 percent. Furthermore, the pace has been picking up over time.

The June update to the ‘dot plot’ of FOMC participants’ interest rate expectations indicates that the majority now think two more interest rate hikes are expected to be needed in the second half of this year. This adds up to four rises in total. Three more hikes are likely next year but just one in 2020.

“Overall that means that while the Fed is forecasting a slightly faster pace of interest rate increases than previously, the total number of hikes expected over the next few years is unchanged from a few months ago”, stated Lloyds Bank.

Market projections for interest rates are a bit less hawkish than the Fed’s forecasts. At least one addition hike is likely this year but a fourth hike is seen as a close call. Furthermore, the gap between Fed and market forecasts broadens through 2019, with the former indicating to about five 0.25 percentage point rises between now and the end of 2019, while markets are only fully discounting just over three moves.

At 20:00 GMT the FxWirePro's Hourly Strength Index of US Dollar was highly bearish at -133.017. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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