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Will they? Wont They?

After months of speculation since the first interest hike in decades, the Federal Reserve looks all set to increase interest rates in June but the caveat being the U.S. economy needs to confirm the view of policymakers that slow growth in the first quarter was temporary.

After months of speculation since the first interest hike in decades, the Federal Reserve looks all set to increase interest rates in June but the caveat being the U.S. economy needs to confirm the view of policymakers that slow growth in the first quarter was temporary.

Minutes of the April 26-27 Federal Open Market Committee meeting released Wednesday in Washington used the word “June” six times in a policy context, prompting economists and financial markets to start pricing in an interest rate increase in June. That seems easy now doesn’t it. But is it that simple?

Let’s try to break it down and look at the factors that will play on the members of the Federal Open Market Committee when they gather on June 16-17 to decide the course of monetary policy in the world’s largest economy.

Firstly, Fed officials headed into the April meeting with a mixed picture of the economy as official figures showed it grew at an annual rate of meager 0.5 percent. In addition, the April jobs report, released since then, has done nothing to allay those fears but instead has fueled further doubt about the sustainability of the recovery. But, early indications of second-quarter growth have been encouraging. Industrial production surged last month; retail sales climbed to the highest levels in more than a year; and momentum in the housing sector continued to build. U.S. consumer prices also jumped, suggesting inflation is starting to rise.

Secondly, the U.S. dollar has been at the forefront of activity but as soon as the Federal Reserve released meeting minutes describing a weaker dollar, the currency surged to a seven-week high. That’s a dilemma facing U.S. central bankers, who are weighing economic data to determine when next to raise interest rates. The Fed’s signals of a potential June move may backfire if the resurgent greenback undermines growth and weighs on stocks and oil prices, ultimately eroding the case to boost borrowing costs. The dollar’s surge since mid-2014 hurt the outlook for growth and inflation, and contributed to the Fed delaying to December its liftoff from near zero. Officials from Janet Yellen to Stanley Fischer have warned that the dollar’s appreciation will limit the pace of tightening.

Consider where the economy stood a few months ago. A global equities sell-off and the tightening of financial markets earlier this year largely due to concerns of a slowdown in China prompted the Fed in March to dial back rate increase expectations for the year. Well, the Chinese economy seems to have settled down for now and financial markets are behaving somewhat normally but a stronger dollar will likely ignite other concerns such as another widerspread rout in commodity prices. The greenback’s rally after the minutes on Wednesday rekindled a sell-off in prices for a wide range of natural resources from crude oil to copper and gold.

Lastly, with great power comes great responsibility, and if you are the most closely watched central bank in the world, it comes with its own set of problems. The section of the minutes that referred specifically to the voting members of the committee noted that their views rested on three points: further progress on inflation and in labor markets, and their sense of the risks around that outlook. This last component, which incorporates a host of hazards that could push the economy off track, is difficult for both economists and Fed officials to define. But there are some evident risks on the horizon. To start with Britain votes June 23 on whether to stay in the European Union or leave. Bank of England Governor Mark Carney warned last week that leaving could trigger a British recession and some Fed officials noted that a U.K. exit could have broader repercussions for financial markets.

With a host of such factors to watch for and just under a month until the meeting takes place, Fed officials have a lot on their plate. In the interim, it’s a good idea to tune in and listen closely listening to what they say during public appearances. Whether we end up with two rate hikes this year, as Fed officials have been advocating, or just one, as most investors seem to continue thinking, will likely end up being a major factor in the direction markets take over the middle term.

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