Fed meet to decide on interest rate hike

The upcoming Federal Reserve meeting will be the first since last month’s shock vote in Britain to leave the European Union. It is expected to hold rates even as traders hope for guidance on policy plans. The uncertainty is a blessing in disguise as pledges are being made around the world to provide support to financial markets.
The impact of pledges have positive impact on global markets, with the Dow and S&P 500 in New York both enjoying a series of records, while strong US data has also boosted the dollar as talk of another interest rate hike
resurfaces.
At the Fed meeting, global political and geopolitical uncertainties will be high on the agenda. “Investors are placing a lot of faith in central banks and fiscal authorities to increase stimulus and improve the growth calculus,” Matthew Sherwood, head of investment strategy at Perpetual Ltd. in
Sydney, said.
Fed’s openness to raising interest rates later this year will depend on their comfort with the health of the labour market data, including several additional indications in recent weeks that the weak job creation numbers for May were indeed an outlier. Meanwhile, the assessment of inflation will remain
essentially unchanged.
Fed officials will be buoyed by the extent to which financial markets have brushed off the surprise outcome of the Brexit referendum in the UK. The response of investors may have been too cavalier, given the considerable uncertainties around what could be protracted and messy negotiations between the UK and its European partners.
Most observers do not expect the Federal Open Markets Committee (FMOC), which sets monetary policy, to raise the crucial federal funds rate when they meet.
“I think it’s very plausible you’ll see zero change,” said Dean Baker, co-founder of the Center for Economic and Policy Research. Policy makers do not want to surprise markets, he added.
With the economy forecast to grow only about 2 percent a year for the foreseeable future as Americans save more and spend less, there just won’t be enough tax revenue to cover the burgeoning costs of programmes for the elderly and poor. Those funding issues will ultimately supersede worries about Fed policy, regardless of which ends up in the White House come January.
Before Britain voted to leave the European Union, many traders believed the Fed would raise interest rates at least once in 2016. Earlier in June, Fed policymakers had indicated that they expected to raise rates twice this year, following their last increase in late 2015.
The probability of an interest rate cut, which stood at 0% before the Brexit vote, has now eclipsed the odds of a rate increase this year.
Traders are assigning a 10% probability to the Fed cutting interest rates at the upcoming meeting, and a more than 20% chance of a rate cut at
subsequent meetings later this year and in early 2017.
The FOMC meetings resolutions will evolve on the US data and the
economic uncertainty created by the Brexit.