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Final Fed meeting will set stage for expected rate hike

Many have been waiting and guessing at when the U.S. Federal Reserve will finally raise rates after maintaining them at 0.00% to 0.25% since 2008. Most analysts expect the move from the Fed to come in September, but a growing number are beginning to forecast that a second rate raise may be in store before the end of the year, reports CNBC.

The Fed is holding its Federal Open Market Committee (FOMC) meeting this week, which is expected to set the direction for the Fed’s decision on whether or not to raise rates later this year. No policy decisions are expected to come out of this week’s meeting, but the tone of the FOMC’s release following their discussion could hint at when the Fed will raise rates.

“Yellen has always said that when wages go up between 4% and 5% that’s when we raise rates,” said Paul Donovan, global economist at UBS investment bank. Employer costs for employee compensation data from the U.S. labor department is currently growing at 4.2%, setting it inside that range.

“This is going to be a very gentle, gradual trajectory, but I think they hike in September and I think they hike in December, I expect two hikes this year,” said Donovan. “Remember inflation really is picking up in the U.S. in a reasonably notable way, it is going to be coming in comfortably over 2% at the start of next year.”

This sentiment has been echoed by others, including San Francisco Fed President John Williams, who said his preference would be for two rate hikes before the end of the year, and Fed governor Jerome Powell , who said he was prepared to raise interest rates once in September and again in December if the economy continues to perform as expected.

Higher rates are not a done deal

Several economic indicators will come out between the Fed’s meeting this week and its September meeting that will influence its final decision on whether or not to raise rates. Two jobs reports, consumer data and inflation numbers, as well as information on U.S. GDP growth in the second quarter could all have an effect on pushing the Fed’s decision on way or the other.

Nomura’s strategist Bob Janjuah, who is often bearish in his outlook, said that he anticipates a fourth round of Quantitative Easing rather than a rate hike. “If U.S. consumption doesn’t pick up then why the hell would the Fed raise rates?” he said.

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