Federal Reserve minutes suggest more aggressive pace of rate hikes

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12 April 2018

thomasdodds

The US Dollar edged modestly higher against its major peers yesterday after the release of an upbeat set of meeting minutes from the Federal Reserve.

L
ast night’s minutes struck a hawkish tone with the Fed seeing a ‘significant fiscal policy growth boost over the next few years’. The minutes noted that ‘almost all Fed officials saw gradual rate hikes as appropriate’ and there were a number of members on the rate setting committee that saw the need for a steeper rate path. This continues to suggest that many members on the board are comfortable with the prospect of as many as four rate increases in the US this year.

Earlier in the session, the highly anticipated US inflation release proved to be mostly a non-event, coming in right in line with expectations. Headline inflation in the US accelerated to 2.4% in the year to March, its fastest pace in a year, while the core rate also ticked upwards to 2.1% from 1.8% and is now back above the Federal Reserve’s 2% inflation target. This reinforces our expectations that the central bank in the US could well raise interest rates at a slightly faster pace than the median ‘dot plot’ from the March meeting would suggest.

Economic news out of the US is fairly light on the ground today, with attention likely to be on events in Europe. This morning’s ECB meeting accounts will be in the spotlight. Investors will be looking for clues as to the likelihood of a removal in the central bank’s QE measures at some point later this year.

Trade-weighted Sterling hits post-Brexit high

Sterling briefly touched its strongest position in trade-weighted terms since June 2016 yesterday morning, with growing expectations for another interest rate hike by the Bank of England in May. The Pound’s rally against its major peers did, however, stall on Wednesday afternoon following the release of the latest industrial and manufacturing production data. Output in the UK’s industrial sector grew by 2.2% in February, although undershot the 2.9% consensus, while manufacturing output came in at 2.5% versus the 3.3% that investors had penciled in.

In the Eurozone, President of the European Central Bank Mario Draghi spoke in Frankfurt yesterday. Draghi voiced concern over a retaliation to US protectionist policies, although failed to comment on monetary policy. Fellow ECB member Hansson also spoke and was fairly hawkish on the topic of monetary policy. Hansson said that policy changes would have to be gradual, although there were risks of waiting too long to normalise the policy.