Welcome to the Investors Trading Academy event of the week. Each week our staff of analysts and educators tries to provide you a better understanding of a major market event scheduled soon and that will have a major an effect on the global markets. With the US economy improving the focus has been on the labor market to lead the Federal Reserve to make its upcoming decision on interest rate increases. The June 5th nonfarm payroll report increased interest in the upcoming FOMC meeting. With jobs soaring well above forecast it is now likely that the Fed will begin raising interest rates in the next 90 days. The June meeting is scheduled for June 17th. The Fed has kept short-term rates near zero since December 2008, and has said it will wait until it sees continued improvement in the labor market and stronger signs that annual inflation is headed back toward the Fed's 2-percent target before raising rates. In a speech late May, Janet Yellen said that the Fed was still on course to raise rates even though we were seeing some lackluster economic data. Yellen said that if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy. To support taking this step, however, I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term. Having said that, I should stress that the actual course of policy will be determined by incoming data and what that reveals about the economy. Some Fed officials believe it would be too early to raise interest rates in June even though a first quarter economic slowdown was unlikely to persist, minutes of the meeting held last month showed. The US recovery has lost momentum during the winter months and the pace of hiring has moderated, the Federal Reserve said in a statement released on April 29th, reinforcing expectations that rates would be kept near zero at next meeting in June or longer. After an unexpected surge in U.S. job gains in May, traders are now betting the Federal Reserve will start raising interest rates as soon as October, and will make a second increase early next year. Traders see a 53-percent chance that the first Fed rate hike will come at the Fed's second-to-last meeting of the year, based on CME FedWatch, which tracks rate hike expectations using its Fed funds futures contracts. They see a better-than-even chance that the Fed will have chalked up two rate increases by its January meeting, the same contracts suggest. Before Friday's report on May jobs, traders appeared convinced that the Fed would need to wait until at least December and perhaps into next year before removing any of its monetary policy accommodation. By Barry Norman, Investors Trading Academy

• published: 09 Jun 2015
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