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11 Dec 2015
Fed set to raise rates - Lloyds Bank
FXStreet (Córdoba) - According to analysts from Lloyds Bank, the Federal Reserve is ready to raise rates for the first time since 2006 and if it stays on hold it would probably be a major blow to the its credibility.
Key Quotes:
“The coming week’s US monetary policy meeting (Wed) could be of historic importance. The FOMC is expected to raise interest rates (by 0.25%) for the first time since June 2006. The recent slide in oil and commodity prices as a whole has prompted some speculation that the FOMC may back off, as they seemingly did in September. However, this time around the FOMC seems to have sent a more emphatic message.”
“In the statement after its October meeting, the FOMC strongly hinted that interest rates would be raised in December unless there was a deterioration in economic conditions. Most Fed speakers since then have reiterated that message. In particular, the labour market, which the FOMC has highlighted as the key area it would be watching, has been much stronger than expected. With financial markets now putting close to an 80% probability on a rate rise, it would probably now be a major blow to the Fed’s credibility if it did not follow up with some action.”
“Attention is already turning to what happens after the initial Fed move. The FOMC has for some time been stressing that any further interest rate increases will take place 'gradually' and that interest rates will likely peak at a low level by historic standards. Fed Chair Yellen is likely to use her press conference to reiterate this message.”
“It will also wish to avoid a potentially sharp adverse market reaction to its initial hike and the best means of achieving this will be to emphasise their intention to move slowly. Moreover, Yellen will want to ensure strong Committee support for this first tightening.”
“However, what the Fed means by ‘gradual’ may not be the same as that assumed by markets. The FOMC’s current median forecast implies four rate rises next year. It may temper this but that still leaves plenty of room for market volatility.”
Key Quotes:
“The coming week’s US monetary policy meeting (Wed) could be of historic importance. The FOMC is expected to raise interest rates (by 0.25%) for the first time since June 2006. The recent slide in oil and commodity prices as a whole has prompted some speculation that the FOMC may back off, as they seemingly did in September. However, this time around the FOMC seems to have sent a more emphatic message.”
“In the statement after its October meeting, the FOMC strongly hinted that interest rates would be raised in December unless there was a deterioration in economic conditions. Most Fed speakers since then have reiterated that message. In particular, the labour market, which the FOMC has highlighted as the key area it would be watching, has been much stronger than expected. With financial markets now putting close to an 80% probability on a rate rise, it would probably now be a major blow to the Fed’s credibility if it did not follow up with some action.”
“Attention is already turning to what happens after the initial Fed move. The FOMC has for some time been stressing that any further interest rate increases will take place 'gradually' and that interest rates will likely peak at a low level by historic standards. Fed Chair Yellen is likely to use her press conference to reiterate this message.”
“It will also wish to avoid a potentially sharp adverse market reaction to its initial hike and the best means of achieving this will be to emphasise their intention to move slowly. Moreover, Yellen will want to ensure strong Committee support for this first tightening.”
“However, what the Fed means by ‘gradual’ may not be the same as that assumed by markets. The FOMC’s current median forecast implies four rate rises next year. It may temper this but that still leaves plenty of room for market volatility.”