The Fed evidently sees itself on the brink of a first rate hike, but it is unlikely to happen at the July meeting. Recent communications from the FOMC and Fed officials have shown growing confidence in the health of the US economy,with a clear belief that further improvement is on track. The fact that the economy is performing more or less as the Fed expects puts it on track for a September rate hike. Federal Reserve Board Chairwoman Janet Yellen did after all say at her congressional hearing on 15 July: “We are close to where we want to be and we now think that the economy cannot only tolerate but needs higher rates”.The only probable obstacle to a September rate hike would be disappointing economic data in the interim. If, however, the economy proceeds more or less in line with the FOMC’s updated June projections, interest rates are then likely to be raised in September. In June the Fed envisaged only moderate growth for the coming months; an unemployment rate at the June level and only marginally higher inflation.“The hurdle is to be cleared in order for this step to occur is not very high. The expected rate hike in September will probably push up US yields in particular and further strengthen the dollar”, said Commerzbank in a report on Friday.Data obstacles to a rate move in September are minimal. Weekly jobless claims released Thursday saw substantial drop in claims to a historic low; the 255k mark is the fewest since November 1973. Claims data combined with the low 5.3 percent jobless rate may lessen the slack Yellen was talking about and put the U.S. on track for a September rate hike.The U.S. economy is rebounding from the winter soft patch, albeit not as sharply as initially expected. Importantly, the labor market never skipped a beat and core inflation has held up reasonably well despite the external pressures. This should give the Fed more comfort to hike, even in the face of a slightly stronger dollar.The data due out next week is unlikely to take the Fed by surprise. The Atlanta Fed’s “GDP Now Tracker,” for example, which estimates GDP growth on the basis of current economic indicators, has been moving between 2% and 2.5% for some time now. The chances of growth picking up in the second half of 2015 are good. Annualized quarterly growth rates of around 2¾% which are required for the Fed’s June growth projection to be realised (1.9% growth year on year in the final quarter of 2015) seem perfectly realistic. “We expect second-quarter US growth to come in at 2.3%, which can at best be described as moderate, taken against the backdrop of the virtual stagnation during the first quarter caused by one-off factors”, added Commerzbank. The dollar trod water at 123.97 yen but was 0.3 percent higher against a basket of currencies. It is likely to continue drifting higher, but in a somewhat controlled fashion.
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