United States Federal Open Market Likely to Raise the Fed Rate

The United States Federal Open Market Committee (FOMC) is set to meet on 13^th and 14^th June 2017 to assess the current state of the US economy and shed light on a possible rate hike.

During the Fed’s previous meeting held last month the committee decided to maintain the Fed rate within the band of 0.75 – 1.00 percent due to a slowdown in GDP growth to 0.7 percent in Q1’2017 from 0.8 percent in Q1’2016 despite a strong labor market growth and rising core inflation.

Previously, the Fed highlighted plans to accelerate its rate-hiking pace hinting at three rate hikes in 2017 on expectations of an improved economic performance this year. Economic analysts expect the Fed to raise the rates to a band of 1.00 – 1.25 percent given that:

• core inflation rose to 1.9% y/y in April close to the federal target of 2.0 percent,
• a relatively strong labor market adding approximately 211,000 new jobs in April, from 98,000 in March, with the economy operating at a full employment of 5.0% and currently operating at an unemployment rate of 4.4 percent
• a strengthening global economy. With the expected rate hikes, we are likely to see the dollar strengthen in the international markets against other major world currencies.

In other local news, the National Treasury has proposed a second Supplementary Budget for the financial year 2016/17 amounting to 64.1 billion shillings bringing the total budget for the current financial year to 2.3 trillion shillings from 2.2 trillion shillings previously.

The supplementary budget, according to the Treasury, is intended to finance the following:

• Replenishing of food reserves to control the prevailing food shortage in the country
• Reelection-related security operations
• Infrastructural development projects

The supplementary budget has provided an allocation of 65.7 percent to development expenditure, 10.1 percent to recurrent expenditure and 24.2 percent to consolidated fund services.

The supplementary budget is anticipated to be funded through debt from the domestic market as the government has managed to maintain interest rates low making borrowing less expensive, further increasing the country’s debt burden.

The current government debt level to GDP is at 52.6 percent which is 2.6 percent higher than the IMF-recommended public debt to GDP threshold for frontier markets of 50.0 percent.