Daily Commentary BY THE CURVE TEAM –

FOMC Hikes, More to Come

14th of June, 2018

The FOMC lifted the Fed Funds Rate target a further 25 bp overnight and signalled that we can expected two more before the end of the year. The rhetoric from FOMC stands in stark contrast to the RBA with Governor Lowe in a speech yesterday reiterating that our benchmark interest rate is going nowhere fast.

The Fed overnight delivered quite a hawkish hike overnight with two increases now expected in 2018 with more to come in 2019. The Fed funds rate is expected to reach 3% next year, before hitting 3.4% in 2020. Unemployment is expected to drift a little lower and inflation forecasts now see the target of 2% being reached this year.

Chairman Jerome Powell also announced at the press conference that from January next year each meeting will be accompanied by a press conference making every meeting live.

Despite the hawkish tone, the Fed again stressed that the normalisation of monetary policy will remain ‘gradual’. They also stressed that the inflation target is ‘symetric’ which suggests that they unlikely to be spooked into ramping up the pace of hikes should inflation move above 2% in the near term.

The word ‘gradual’ also remains the key word for the RBA. Governor Lowe, who spoke at an Australian Industry Group function yesterday, delivered a speech titled ‘Productivity, Wages and Prosperity’. While there wasn’t much in the way of new information in the speech, he did highlight that without wages growth we are unlikely to see a pick up in inflation.

While the cash rate spread between the Australia and the US moved further into negative territory, moves further out the curve were not as linear. The US curve finished the session the flattest is has been in over a decade. Short end yields continue to rise on interest rate expectations while longer term economic concerns continue to weigh on longer term yields.

It will be a big day locally with the May employment figures due out at 11:30. Another solid increase in jobs growth and a dip in the unemployment rate is expected by the market.

David Flanagan

Director - Interest Rate Markets