Yellen to unveil another hawkish hold in Fed's first post-Brexit meeting

Jake Cordell
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Janet Yellen has tried to tell markets to expect an interest rate rise soon - but the Fed still hasn't delivered
Janet Yellen has tried to tell markets to expect an interest rate rise soon - but the Fed still hasn't delivered (Source: Getty)

The US Federal Reserve will stand firm this week when it gets the chance to make its first move on interest rates since the UK voted to leave the European Union.

Markets and analysts say there is no chance the Fed's rate-setting Federal Open Market Committee (FOMC) is going to hike rates this Wednesday, but attention will be focused on the slightest clues on the Fed's thinking as to a rate rise later in the year from the FOMC's accompanying statement.

When chair Janet Yellen last convened the rate-setters just one week before the EU referendum, a shocking domestic jobs report and nerves in the financial markets spooked the FOMC, which pressed the pause button until after the referendum. With markets having settled, and the jobs recovery back on track, analysts expect Yellen to signal a future hike, possibly in September.

"Although expectations have risen that the Fed remains on course to hike US rates at least one more time in 2016, it is unlikely that this will happen in July," said Oliver Kolodseike, an economist at IHS Markit.

Chris Iggo, fixed income specialist at Axa, said the Fed is in a difficult spot when it comes to the timing of the next interest rate rise. Yellen does not "want to derail an economic recovery that few seem to have much confidence in, despite the evidence from pretty robust economic data" he said, while noting the Fed is also keen "to prevent a strengthening of the dollar that could force a re-run of the commodity and emerging markets downturn of 2015."

Read more: Has the Fed missed the boat on interest rate rises?

The Fed has tried, with limited success, over recent weeks to convince markets it is serious about raising interest rates at least once more this year. In January, market pricing suggested the chances of rates being higher than their current target level of between 0.25 and 0.5 per cent by the date of the September meeting was 90 per cent. Immediately after the UK referendum that fell to practically zero, before rising on the back of strong domestic data to 18 per cent.

When it raised rates for the first time since the financial crisis at the end of last year, Fed policymakers signalled four more rounds of tightening were on the cards for 2016.

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