Fed's further tightening in 2016 likely due to higher inflation

Yesterday, the Federal Reserve increased its target range for the fed funds rate by 25 base points. The Fed Chair Yellen indicated that the central bank is on the path of policy tightening, and it will increase its policy rate gradually.

The rate hike will change the economic outlook of the economy; hence, the Fed revises its real GDP growth, unemployment and inflation projections. However, it expects the unemployment rate to remain unchanged at 4.9%. 

Markets anticipate two more rate hike in 2016 after this move. However, due to higher inflationary pressure the speed of Fed's tightening policy will be more than what markets envisaged.

"We believe the Fed will hike rates again in March. At this juncture, we do not expect the Fed to start letting its balance sheet shrink until H2 2016 at the earliest", argues Nordea Bank.