Tom Porcelli at RBC says the Federal Reserve is "on course for a September lift-off" in the Fed funds rate. This would not only defy the wishes of the IMF - whose managing director Christine Lagarde has called for the Fed to wait until next year before raising rates - but would also surprise futures markets. These, say Brian Smedley at Bank of America Merrill Lynch, "are unconvinced a September hike is likely": they are pricing in only a 50-50 chance of a rise then.
One reason to expect a rise is that the economy is growing well: most economists expect GDP to rise by around 0.7 per cent in the second quarter.
Another reason is that employment is rising sharply: latest figures show a 280,000 net increase in non-farm jobs last month. "The labour market is approaching full employment," says Societe Generale's Aneta Markowska. (Full employment is considered to be an unemployment rate of around 5 per cent: it is currently 5.5 per cent.)
She warns that as unemployment falls further, wage inflation could accelerate. Already there are signs of this: hourly wages rose 2.3 per cent in the 12 months to May, the fastest increase since 2009.
For this reason, many economists believe that stable price inflation - at 1.8 per cent, consumer price inflation excluding food and energy is the same rate as a year ago - will not stop the Fed acting because such stability might be only temporary.
Steven Englander at Citi says there's a danger that rates could rise in the long-term by more than markets expect; he points out that most Fed officials think a normal fed funds rate would be around 3.5 per cent but futures markets expect only a 2 per cent rate even in 2018. If this happens, he says, it would cause "much higher volatility and very likely lower returns", on bonds and equities.
There is, though, also the opposite risk. One reason why employment is growing so much is that labour productivity is weak: it has fallen in the last two quarters and might do so in the current quarter too. This implies low trend growth in GDP and hence low real interest rates. But if rates stay low, the Fed won't be able to respond sufficiently to any downturn by cutting them much - which means the next recession might create severe problems for policy-makers and markets.
