Trends in the Economy

US FED rate hike sounds like Alarm bell

Global equity markets are dancing on the tune of US Fed’s comments since long time. In the beginning of this year, the Fed signaled that four rate hikes were likely in 2016, but that was scaled back in March due to a global growth slowdown, financial market volatility and concerns about tepid US inflation.

In September FOMC meeting, the US Federal Reserve left the federal funds rate target range unchanged at 0.25-0.50%, but seemingly prepared the ground for an increase in 2016, saying it had decided to wait “for the time being”.

The US Federal Reserve’s decision to stand pat on interest rates eased concerns of fund flows into emerging markets being hit. The US central bank left interest rates unchanged and decided to wait for further evidence of continued progress in the economy, even as the case for a rate hike has strengthened.

Fed’s latest economic projections signaled that an increase in interest rates was likely in December. However, projections for the next couple of years were lowered, which further boosted sentiment.

The FOMC members’ updated economic projections also signaled that an increase in interest rates was likely in the last quarter of the current calendar year, most likely in December. According to the projections, only three out of the 17 FOMC members expect the target range to remain at 0.25-0.50% by the end of 2016. The median of members’ estimates, however, suggests just the one rate hike of 25 basis points in 2016, down from two in June.

The Fed will next meet on November 1-2, which is being discounted by the markets as a possible rate hike opportunity due to the presidential elections which will be held in the week after the Fed’s meet. The Fed’s last meeting for 2016 is slated for December 13-14.

The median of FOMC members’ expectations of the federal funds rate at the end of 2017 and 2018, too, were lower than the June projections by 50 bps each. The median for longer run interest rate expectations was down at 2.875% as against 3% in June.

Commenting on the economy, the FOMC’s statement said the labour market had continued to strengthen, and the growth of economic activity had “picked up from the modest pace seen in the first half of this year”. Job gains had been “solid, on average”. FOMC expected one rate hike this year if the job market continued to improve and major new risks did not arise.

Arihant Team
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