Federal Reserve policy tightening to set pace into 2016

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The big-money event of December usually comes on the 25th day of the month. This year, Wednesday the 16th is proving almost as hotly anticipated.

The Federal Reserve’s two-day rate-setting meeting ends on Wednesday and is expected to culminate in a 25 basis point rise in the central bank’s overnight Fed funds rate, the first since the financial crisis.

Attention is focused on the pace and expected extent of the monetary policy tightening cycle.

TD Securities expects the tone of the press conference given by Janet Yellen, Fed chair, to be “balanced”, adding: “Ms Yellen will have significant scope to reinforce the ‘data dependency’ and ‘gradual’ path for future tightening in the press conference.”

TD expects three further Fed rate rises in 2016, with the second one coming in March, tightening official borrowing costs by a total of 75bp over the calendar year.

Citi expects a “very gradual” pace and said “the external environment is not conducive to a normal Fed hiking cycle” due to “fragilities” in emerging markets.

“As the Fed’s September meeting showed, external developments play a greater role in setting policy than they used to,” said Citi’s Willem Buiter.

Barclays is also predicting three rate hikes for next year but thinks that the dollar’s rally over 2015 has pretty much priced in any December rate rise.

“The next round of dollar appreciation may have to wait until another hike becomes warranted by future economic data,” said Barclays’ Shinichiro Kadota.


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