Fed signals further moves as loans rates rises to 4.75%

The big news yesterday, and what we had been waiting for, the US Federal Reserve raised rates by 25bp as expected but more significantly signalled that further hikes were on the cards.

More importantly, the accompanying statement hinted at more to come, with the FOMC stating that the US economy had “rebounded strongly” in the current quarter, that possible increases in resource utilisation, in combination with elevated energy and other commodity prices, “have the potential to add to inflation pressures” and that some further policy tightening “may be needed”.

The market responded by regarding a May rate hike, always a strong prospect, as a done deal. Yet the statement did little to cement prospects for further rises beyond that.

The Fed’s statement was fairly upbeat as it notably avoided commenting on recent economic weakness – namely new home sales which recorded their biggest drop in 9 years – while issuing a positive view on the economy – “economic growth has rebounded strongly in the current quarter” and “the slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors”.

The USD benefited from the comments but the net effect was not as strong as it could have been following strong German economic data earlier in the day. The Ifo index came in at its strongest in 15 years pushing the EUR/USD towards 1.2100 and the GBP/USD above 1.7500.

Following the Fed’s comments the GBP/USD fell back to the low 1.7400’s and is currently in danger of dropping below this level – and while writing actually has had a brief did below. The EUR looks more vulnerable and is just managing to hold the 1.2000 level.

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