Further interest rate hikes by the U.S. Federal Reserve should be gradual or they risk hurting already fragile emerging economies. Specifically, if oil prices remain at current levels or fall even lower, it is doubtful the Fed will hike rates again already in March. Financial market turmoil stemming out of China if sustained, could also derail the Fed rate hike path.
Solid underlying domestic demand, a strong labour market and increasing underlying inflation pressures supports expectations for the Fed to hike rates four times in both 2016 and 2017. As long as underlying domestic demand and the labour market remain strong, the Fed is likely to look past the weakness in manufacturing and potentially soft headline GDP numbers. Expectations are for the Fed to take a "wait-and-see" attitude at the next meeting on 26-27 January and resume with its next rate hike at the 15-16 March FOMC meeting.
Analysts at Nordea Markets see the fed funds target range at 1.25-1.50% by end-2016 and 2.25-2.25% by end-2017, in line with the median FOMC projection from December. By contrast, fed fund futures contracts point to only two rate increases this year and in 2017.
