The Federal Reserve is likely to give US interest rates another hike next month, according to the minutes of its latest policy meeting published this evening.
Unless the economy is blown off course, American ratesetters are gearing up to raise interest rates for only the second time since the financial crisis when they next meet on 14 June.
The Fed's Federal Open Market Committee (FOMC) "judged that if incoming data were consistent with economic growth picking up in the second quarter, labour market conditions continuing to strengthen, and inflation making progress toward the FOMC's two percent objective, then it likely would be appropriate … to increase the target range for the federal funds rate in June".
The dollar jumped against the euro on the news, rising to €0.8906, from €0.8859 – a 0.5 per cent spike. The greenback also recovered some ground against sterling, after an opinion poll which gave Remain an 18-point lead over the Leave side in the EU referendum campaign sent it down earlier in the day.
Before the minutes were released, the pound was trading at $1.4632, but dropped 0.3 per cent to $1.4586 soon after.
Devil's in the data
Weak growth data for the first quarter and a wobbly dollar had pushed market expectations of the second interest rate rise back a few months, but the Fed said it was "concerned that market participants may not have properly assessed the likelihood of an increase in the target range at the June meeting."
Participants expressed a range of views about the likelihood that incoming information would make it appropriate to adjust the stance of policy at the time of the next meeting. Several participants were concerned that the incoming information might not provide sufficiently clear signals to determine by mid-June whether an increase in the target range for the federal funds rate would be warranted. Some participants expressed more confidence that incoming data would prove broadly consistent with economic conditions that would make an increase in the target range in June appropriate.
– Federal Open Market Committee
The Fed pointed to strong inflation at home as it laid the groundwork for a June hike while also observing that weakness in emerging markets "appeared to have abated somewhat" over recent weeks.
However, nerves over the EU referendum have travelled across the pond, as the Fed also said that the possibility of Brexit could knock their own path for interest rates off course.
"Global financial markets could be sensitive to the upcoming British referendum on membership of the European Union," the Fed noted.
Ian Shepherdson of Pantheon Macroeconomics said "These minutes reflect a substantial step towards the next hike … but the danger posed by Brexit is still a very real barrier to action".
Ratesetters also pointed to China as the other major potential concern, acknowledging that the US economy was sensitive to "unanticipated developments associated with China's management of its exchange rate."
The Fed raised rates from their near-zero level for the first time since the crisis in December 2015, and had signalled there could be four further rate rises this year. As the effects of that move rippled through the global economy, it became clear that it was more likely there would only be one or two.
The federal funds target rate – the Bank's headline interest rate – is currently set between 0.25 per cent and 0.5 per cent. An increase in June would take the official range to between 0.5 per cent and 0.75 per cent
Today's comments are more bullish than many expected and should focus markets on the next meeting, which will take place just one week before the EU referendum.