Expect second US Federal Reserve rate hike in September

US Federal Reserve’s tone was more dovish than expected after monetary policymakers voted unanimously to keep the interest rate range between 2.25%-2.5%. 

Members changed their outlook for 2019 from two increases, predicted at their December meeting, to no movement and warned that "growth of [US] economic activity has slowed from its solid rate in the fourth quarter".

"Recent indicators point to slower growth of household spending and business fixed investment in the first quarter," they added. 

However, Andreas Johnson, US economist at Nordic bank SEB, forecasts a final rate hike for September 2019. 

“In light of expectations of an improving outlook, we are sticking to our forecast that the Fed will deliver a final rate hike in 2019. However, [Wednesday’s] message was a bit more dovish than we predicted. We now expect the Fed to deliver a final hike in September 2019 rather than in June 2019,” Johnson wrote in a note to clients.

By then the central bank should be certain that growth has recovered enough to allow for a final hike that brings the Fed funds rate close to the neutral rate level, he added.

The slowdown in activity in the first quarter has reinforced the Fed’s ‘wait-and-see’ approach. However, the expected growth deceleration is to a large extent the result of temporary factors such as government shutdown and lower than expected tax refunds, Johnson added.

“We foresee US economic activity accelerating in the second quarter. Chinese stimulus along with a softer monetary policy from the European Central Bank (ECB) means that the global outlook also should improve. We expect the US and China to reach a trade agreement in the coming months, and financial conditions have eased in 2019 as stock markets have rebounded.”