U.S. Federal Reserve ready to hike interest rate in June
Canadian dollar sells off on prospect of higher U.S. interest rates
The U.S. Federal Reserve will likely raise interest rates in June if economic data points to stronger second-quarter growth as well as firming inflation and employment, according to minutes from the U.S. central bank's April policy meeting released on Wednesday.
That view, expressed by most Fed policymakers at the last policy meeting, suggests the central bank is much closer to lifting rates again than Wall Street expects.
In the wake of the news, the Canadian dollar sold off sharply against the U.S greenback. The loonie dropped 0.71 of a U.S. cent to close at 76.79 cents US.
Prices for futures contracts on the Fed's benchmark overnight lending rate on Wednesday implied that investors only saw a 19 per cent chance of a rate increase next month.
But members of the Fed's policy-setting committee said recent economic data made them more confident inflation was rising toward their two per cent target and that they were less concerned about a global economic slowdown, according to the minutes from the April 26-27 meeting.
"Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor markets continued to strengthen, and inflation making progress toward the committee's two per cent objective, then it likely would be appropriate for the committee to increase the target range for the federal funds rate in June," according to the minutes.
Wary of slowdown
Some policymakers were wary about a slowdown in U.S. economic growth during the first quarter, when gross domestic product expanded at a two-year low of 0.5 per cent. But others argued that ongoing robust job growth suggested the economy was still on track and the growth data could be flawed.
"Most pointed to the steady improvement in the labor market as an indicator that the underlying pace of economic activity had likely not deteriorated," according to the minutes.
Some policymakers said they were concerned financial markets could be roiled by a possible British exit from the European Union in a vote next month or by China's exchange rate policies.
At its April meeting, the Fed kept its target overnight interest rate in a range of 0.25 per cent to 0.50 per cent. The Fed hiked rates in December for the first time in nearly a decade.
A global equities sell-off and the tightening of financial markets earlier this year largely due to concerns of a slowdown in China prompted the Fed in March to dial back rate hike expectations for the year.
Even so, the Fed signaled at that time that it would likely increase rates twice this year. Investors have been betting on just one hike.
"June is definitely a 'live' meeting for the next rate hike, but a super-cautious [Fed chair Janet] Yellen might well wait for more convincing evidence of a sustained pickup in the economy and a resolution of Brexit risks before pulling the trigger in July," said BMO Capital Markets senior economist Sal Guatieri. "We still lean toward the latter."
With files from CBC