In this economic research note, we look at the Fed's next steps, examine the central banks' revised economic forecasts and look at the financial market implications of today's hike.

As widely expected by us and the market (with a 98% probability priced in), the US Federal Reserve (the Fed) has raised the Fed Funds target rate by a further 25 basis points to a 1.0%-1.25% range. The Fed also announced details of the normalisation in the balance sheet, which is expected to get underway before year end.

In this economic research note, we look at the Fed's next steps, examine the central banks' revised economic forecasts and look at the financial market implications of today's hike.

Implications for US markets

  • The Fed’s rate hike today was widely expected by the market. Perhaps the decision to keep the policy outlook unchanged, ie. no change in the ‘dots’, could have been interpreted as slightly ‘hawkish’ given the recent run of lower-than-expected inflation readings. The decision to detail the plans for balance sheet adjustment could also be seen in this light. 
  • However, the key driver for US financial markets today was the weaker-than-expected May CPI report. 
  • Headline CPI was -0.1%/mth in May, with the annual rate down to 1.9% from 2.2%. The core CPI rose just 0.1%/mth, with the annual rate down to 1.7% from 1.9% previously.
  • The US equity markets were mixed on the day. The Dow is up around 0.2%, with the S&P 500 down -0.1% on the day.
  • US 10 year government bond yields are down around 9bp at 2.13%, while 2 year yields are down 3bp at 1.33% - flattening the yield curve.