- The Fed has ruled out the increase in interest rate during the FOMC meeting that ends today. As such, the Fed will reaffirm its view tonight that the current 0% to 0.25% target range for the federal funds rate remains appropriate.

- Meanwhile, a hike in September remains a probing question while investors look for signals in the Fed’s statement during this FOMC meeting.

- Fed Chair Janet Yellen said in a recent speech that if the US economy continues to improve, it will be appropriate to begin the process of normalising monetary policy.

- With that, the Fed will likely take the initial step at some point this year to raise the federal funds rate target from a record low.

- Before raising rates, the Fed will have to be convinced that labour markets have made sustainable progress while inflation is gradually moving towards the Fed’s 2% target.

- In May, the jobless rate was at 5.5% as more people joined the labour force during the month (vs. 5.4% in April). In March, the Fed projects unemployment rate to fall to 5.0%-5.2% in 2015.

- In March, the Fed’s median estimate for unemployment was lowered for both this year and next year (refer to Chart 1). The Fed will provide the update of its key economic projections later today.

- The Labor Department recently reported that wages in May rose 2.3% YoY, compared to the Fed’s target of 3.0%. However, it clearly signals that the labour market is pushing wages higher.

- All in, the Fed will likely reiterate its position that the timing of a rate hike will continue to depend on incoming data and that a decision to lift rates will come when the data shows sustained growth and momentum.

- As a recap from the last FOMC meeting, the Fed had highlighted that growth in household spending had declined despite strong growth in households' real incomes.

- Elsewhere, business fixed investment softened, the recovery in the housing sector remained slow, and exports declined.

- Also, inflation continued to trend below the FOMC's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of imports. Note that core PCE was at 1.2% YoY and PCE stood at 0.1% in April.

Source: AmeSecurities Research - 17 Jun 2015