As was widely expected, the U.S. Fed had hiked its interest rates in December to 0.75 percent. The ‘dot plot’, which is the median policy rate projection of members was upped to three rate rises in 2017 from two previously, with almost half of participants already incorporating the incoming administration’s possible fiscal or other policy changes into their economic projections. However, the December meeting minutes also recorded ‘considerably uncertainty’ about the fiscal stimulus plans detail and also downside risks to economic activity and inflation from additional appreciation of the USD.
Given that the policymakers had anticipated four hikes in 2016 one year ago and ended up hiking rates just once, markets continue to be wary regarding the pace of tightening monetary policy in 2017. Fed Funds futures show that markets price around 40 percent possibility of three or more hikes in 2017. According to a Lloyds Bank research report, the Fed policymakers are expected to wait and assess the effect of new fiscal stimulus measures.
“We see the next rate rise to 1 percent in June, followed by another rise to 1.25 percent in December”, added Lloyds Bank.
The central bank is not expected to change rates during its next meeting on 1 February; however, there is possibility of the Fed hiking in March if there are signs of a considerably rebound in domestic inflationary pressures. Moreover, there is probability that the pace of policy tightening might be ramped up in 2018 when fiscal stimulus measures, if implemented, are expected to have a greater effect on the U.S. economy, stated Lloyds Bank.
