Despite a disappointing start to the year, evidence is building that the U.S. economy has shaken off the first quarter slump. More importantly for the Fed, the labor market is expected to continue to make progress. There are nascent signs of wage growth emerging, which augurs for stronger consumer spending and moderately higher inflationary pressures. The housing market has also shown signs that it has rebounded from its winter lull.
The Fed acknowledged the better economic momentum in its recent statement, and the Fed is likely to telegraph a September rate hike more forcefully at the next FOMC meeting in July.
"TD expects that the Fed will hike rates gradually with pauses in between moves, to gauge how the economy is reacting to higher rates. The Fed funds rate expected to reach 1.25% by the end of 2016." estimates TD Economics
