19th November 2015
In the wake of the better economic backdrop the US central bank has indicated that it is gearing up to push interest rates higher in December.
The minutes of the late-October Federal Open Market Committee (FOMC) meeting, which is responsible for setting rates, revealed that while the Fed participants were not ready to flick the switch in October, most participants thought that the conditions could be necessary to warrant the start of policy normalisation at the December meeting.
Since the FOMC’s meeting economic developments have been upbeat, notably the substantial 271,000 increase in payrolls and the associated pick-up in wage growth to 2.5%
In addition, Fed officials have been talking up the possibility of a rate hike sometime soon.
On Wednesday Atlanta Fed President Dennis Lockhard stated that he is “comfortable with moving off zero soon”.
Capital Economics US economist Steve Murphy said: “The big change in the October policy statement was that the Fed put the possibility of a December rate hike back on the table.
“With regards to the future path of the fed funds rate, participants generally agreed that the pace of increases would be gradual. The minutes noted that the committee viewed that the exact timing of the first rate increase was less influential to its economic outlook than the expected path of the funds rate.
“Nevertheless, our view is that following a first rate hike in December, the Fed funds rate will be between 1.75% and 2.00% by the end of 2016.”
The central bank has now held its benchmark for short-term interest rates near zero since 2008. If the Fed does increase the cost of borrowing next month, it will be the first time it has done so in nine years.