The prospect of a second US interest rate rise since the recession has slipped back following weak GDP data and some dovish comments from one of the Federal Reserve's key rate-setters.
Futures markets now indicate the probability of a rate rise by the end of the year is less than one in three, down from around 50 per cent following last week's fairly hawkish statement from the Fed.
President of the New York Federal Reserve, William Dudley, today admitted growth in the first six months of the year has been "sluggish" and signalled risks were mounting to the world's largest economy.
Dudley is seen as a key ally of chair Janet Yellen and holds a permanent position on the rate-setting Federal Open Market Committee (FOMC). He said in a conference in Indonesia this morning: "Evidence that US monetary policy is currency only moderately accommodative, the fact that US financial conditions have been influenced by economic and financial market developments abroad, and risk management considerations argue, at the moment, for caution in raising US short-term interest rates."
He was careful not to rule out the prospect of a rate rise, adding that should the economy recovery quickly, he could foresee a situation where rates needed to go up before the election.
The comments mark a mini retreat from last week's official statement from the Fed which analysts said had opened the door to a September rate rise. In the central bank's carefully coded language, as it held interest rates in the official range of between 0.25 per cent and 0.5 per cent, it said: "Near-term risks to the economic outlook have diminished."
That decision not to raise rates was made as economists were expecting the US to bounce back from a weak first quarter and chalk up growth in the region of around 2.5 per cent a year. Instead, official figures released two days after the meeting showed GDP expanded by only 1.2 per cent on an annualised basis.
The Fed raised rates for the first time since the recession last December, signalling four more rounds of tightening would be on the cards this year. Rate-setters have been spooked from following through on a number of occasions however, with financial market turmoil in the spring, the UK's EU referendum in June and a few disappointing data dumps, such as the jobs report and last week's GDP numbers.