US Fed likely to tighten monetary policy gradually

The US Federal Reserve has held off from raising interest rates further so far in 2016 after hiking in December 2015 for the first time in almost one decade. Broad-based economic growth has been weak despite stronger employment growth recorded in the first half of 2016. Furthermore, there has been a gradual rebound in wage growth and general inflation.

Firmer economic growth in the second half of 2016, moderate rises in inflation and a tight labor market should call for a gradual tightening of the monetary policy, said Lloyds Bank in a research note. But, on balance, it is quite soon for the central bank to hike rates in September. However, a rate rise in December to 0.075 percent is a more expected outcome, according to Lloyds Bank.

“We currently also look for two further quarter-point increases in 2017,” added Lloyds Bank.

Fed Funds futures attach just 22 percent likelihood of a rise in September and 51 percent possibility of a hike by December. The implication from the projection is that markets at present are underpricing the possibility of rate hikes, stated Lloyds Bank.