Federal Reserve hints at more US interest rate hikes. The Chairman of the Federal Reserve, Jerome Powell, has suggested there could be more US interest rate rises on the way. It has already been projected there will be three rate rises this year, but Mr Powell advised a Congressional Committee in late February that this could change in March when updated forecasts are prepared. The proposed hikes are likely as the US Federal Reserve wants to peg inflation to a target rate of around 2%.

Effects of Federal Reserve comments

The comments helped increase the dollar by 0.5%, with US government ten year borrowing costs soaring to 2.92%. The Dow Jones was down by 0.4% and the S&P 500 Index dropped by 0.63%. The next Federal Reserve meeting is due in mid-March and Paul Ashworth of Capital Economics is forecasting that there will be an interest rate hike in March, followed by a further three rate rises through 2018.

Mr Powell has stated that all “incoming data” is suggesting “a strengthening in the economy, we have seen continuing strength in the labour market, we have seen some data that will add confidence to my view that inflation is moving up to target.” He added: “we’ve also seen continued strength around the globe, and we’ve seen fiscal policy become more stimulative. Each of us will be taking the developments since the December meeting into account.

Cautious Tone

There were cautious notes in Mr Powell’s speech as he noted: “there are few signs that the US is overheating to any excessive degree.” So analysts are of the opinion the proposed rate rises will not prove too sharp.

Concerns about US interest rate rises hit the European markets and affected the FTSE 100 in trading towards the end of February, start of March as commodity prices dropped, due to the fact they are priced in dollars. The US/Euro zone bonds’ two year yield spread is already at the widest ever levels since the inception of the Euro in 1999, due to drops in US Treasuries. European markets opened around 0.5% down as traders struggled to figure out how the proposed changes would affect them.

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Sources:

Guardian Business – US Rate Fears

Telegraph – Powell Hints At Rise

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