FOMC likely to hike before year end

The decision of the Federal Open Market Committee to maintain the policy target range of 0-0.25% at its September policy meeting prompted a sharp fall in US Treasury yields. The impact was particularly marked on short-dated bonds although 10-year rates also fell and, at close to 2.15%, are currently around 15 basis points lower than immediately before the Fed's announcement.

In its post-meeting statement the FOMC acknowledged the ongoing improvement in domestic economic conditions since its previous meeting in July. However, the Committee was also concerned about subsequent, mainly external, developments. 

These included the ongoing deterioration of China's growth prospects, financial market turbulence, a relapse in commodity prices and the strengthening of the US dollar. These factors combined to press down on the Committee's projections for both inflation and the Federal funds rate over the next three years.

"Looking ahead, the FOMC is expected raise the policy rate by 25bp before the end of 2015, probably at its December meeting. The weakened external picture and dollar strength pose clear downside risks to the US economic growth and inflation outlooks", says  Lloyds Bank.

However, it is anticipated that these potential headwinds will fade over the coming months which will see the FOMC's focus shift, commensurately, back towards the robust domestic picture and the underlying build-up of inflationary pressures. 

It is also worth noting that the September 'dot plot' of individual members' interest rate forecasts indicated that thirteen of the seventeen participants expected a hike before year-end. 

"Given the FOMC's avowed intention to proceed cautiously, only two rate increases are likely in 2016. As external risks fade and policy stance firms, Treasury yields of all maturities can be expected to rebound, especially at short-end. 10-year yields are forecasted at 2.5% by end of 2015 and 2.8% by end-2016", added Lloyds bank.