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Fed turns ‘mildly hawkish’

The Fed said the labour market had strengthened and that economic activity has been expanding at a moderate rate. It noted that job gains were strong in June following weak growth in May. It emphasised that it will watch carefully for any signs it will overshoot its 2% inflation target over the coming weeks and months.

Rick Rieder, chief investment officer of fundamental fixed income at BlackRock said the tone of the Fed’s comments was slightly different than in recent meetings.

“At the close of its July meeting, the Fed released a mildly hawkish statement that continues to strike a balance between its “wait-and-see” approach and the increased likelihood for one rate hike before year end. Nevertheless, in our estimation, the utility of extraordinarily low interest rate levels has long since passed much effectiveness in stimulating real economic growth and for some time now has solely been influencing the financial economy as a price-supporting mechanism.”

“That suggests that the baton must now be transferred from monetary authorities to the fiscal channel, if we are to see any meaningful re-rating of economic growth in the U.S,” Rieder continued. “This possibility brings with it a great deal of uncertainty, as its probability has as much to do with political events as it does economic common sense.”

Despite the stronger numbers in the US, Rieder does not expect any big moves from the Fed imminently.

“Interest rate policy normalisation this year may be difficult for the Fed to accomplish, particularly should jobs growth continue on its slowing trend, inflation expectations and realized inflation remain fairly moderate, and both domestic and international political risks continue to unsettle financial markets,” he said. “Thus, unless we see a significant improvement in economic data, further stability in global financial markets, and a meaningful pickup in inflation measures, we are likely to see only one more rate hike this year, with the year’s last third as the most likely time for it.”

Part of the Bonhill Group.