Fed hikes interest rates

The Fed raised interest rates by 25bps at yesterday’s meeting, as widely expected, and signalled that one further quarter point increase is likely over the remainder of this year (it also still sees a further four 25bps hikes next year), while also outlining a plan to very gradually reduce the size of its balance sheet which it said could begin relatively soon

The Fed revised up slightly its forecast for GDP growth this year and revised down its forecast for the unemployment rate, though it also lowered its projection for inflation following recent weak readings (albeit inflation is still expected to return to its target of 2% next year)

The dollar recovered ground against the euro following the Fed meeting, returning to around $1.12 having fallen to almost $1.13 earlier in the day following softer than expected CPI and retail sales data in the US. Bond yields in the US also fell post this data but remained at their lower levels (of around 2.12% in the case of 10-year yields) after the Fed meeting

The unemployment rate in the UK was unchanged at 4.6% in the three months to April, though the annual growth in earnings (ex bonuses) slowed to 1.7% from a downward revised 1.8% in Q1. Slowing wage growth alongside a continuing rise in inflation is squeezing household incomes and dampening spending

The Bank of England’s MPC is expected to keep interest rates unchanged at 0.25% today and reiterate its neutral policy stance i.e. rates can be changed in either direction in response to changes in the economic outlook, though there may again be one dissenting vote in favour of an immediate rate increase. Sterling is little changed at just under 88p ahead of the rate announcement

Data due today include retail sales in the UK and industrial production in the US