The minutes from the US Federal Reserve’s monetary policy meeting at the start of November were judged to be supportive of a possible rate hike in December. Federal funds futures contracts are now fully pricing in a 25bps increase, which would see the Fed lift their key interest rate to a range between 0.50% – 0.75%. Treasury bond yields moved higher following the release.
Fed officials have plenty to ponder ahead of their next meeting, to be held on the 13th and 14th of December. As ever, the Fed are likely to take their lead from financial markets so it would be a big surprise if they decided not to raise rates. Of more importance will be the Fed’s outlook for interest rates over the next year, remarks on fiscal policy and US dollar strength.
At the September meeting, the number of rate hikes expected in 2017 was reduced from three to two, according to the median forecast of FOMC participants. The ‘lower for longer’ theme was extrapolated, yields moved lower and the price of gold moved higher. However, since the election of Donald Trump as the next US President the narrative has changed, yields have risen sharply and the price of gold has slumped.
One CNBC commentator called it a shift from ‘lower for longer’ to ‘further and faster’, postulating that if a Republican Congress passes Trump’s fiscal policies the Fed may be forced to pursue additional rate hikes at a faster pace. We have also seen the US dollar strengthen considerably on the prospect of such an outcome. However, the stronger US dollar could bring its own challenges for the US external sector, which has so far gone ignored.