The Australian dollar dropped by a cent, shares eased and the overnight ASX 200 futures market dipped to a tiny loss after the US Federal Reserve hardened its interest rate rise outlook.
For the second time in as many days the US central bank indicated another rate rise could be closer than markets expect.
According to minutes from the US central bank’s April policy meeting released this morning, our time, the central bank could raise interest rates at its two day June meeting if economic data points to stronger second-quarter growth as well as firming inflation and employment.
That view suggests the central bank is much closer to lifting rates again than Wall Street expects. It’s also reflective of what policymakers, including Dennis Lockhart, have been saying, especially on Tuesday in Washington when Lockhart’s comments triggered a sell off in markets and a surge in US interest rates.
Lockhart is a non voting Fed member this year, but he is one of the leading inflation first hawks on the central bank’s key policy committee.
The Aussie dollar traded through a daily range of more than a cent and ended around 72.30 US cents after reaching as high as 73.33. The overnight ASX 200 futures market moved to a one point loss after showing a small gain earlier in the night.
Wall Street weakened, although only the Dow dipped into negative territory. The S&P 500 and the Nasdaq remained in the green at the close.
The S&P 500 closed up 0.42 points at 2,047.63, the Dow eased 3.36 points to close at 17,526.62 after trading within a 218-point range during the day and was up more than 100 points before the minutes and down as much as 100 points afterward. And the Nasdaq Composite finished up 23.39 points, or 0.5%, at 4,739.12.
The minutes of the Fed’s Open Markets Committee said recent economic data made them more confident inflation was rising toward their 2% target and that they were less concerned about a global economic slowdown.
"Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labour markets continued to strengthen, and inflation making progress toward the committee’s 2 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.
"Most pointed to the steady improvement in the labour 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% to 0.50%. The market has been betting on just one rate hike this year from the Fed, but the June meeting will produce a new set of forecasts for the economy and its now famous ‘dot plot’ which indicates where members of the Open Markets Committee see interest rates heading over the next three months to two years. It is that graphic which drives interest rate expectations in the markets.
But the big imponderable remains the Brexit vote in the UK. A poll out overnight suggested the ‘remain’ vote could be in front, but there remains a high number of undecided voters who could trigger a switch at the last minute, as they did a year ago with the general election victory by the Conservatives.
