Three US Fed rate hikes likely this year, starting this week

Markets expect three interest rate hikes by the US Federal Reserve this year, with an 88.6% probability of the rate being increased to 0.75-1% on 15 March


The chart shows that, assuming they do raise the interest rates on 15 March, the probability of the next rate hike goes beyond 50% by the US Federal Reserve’s June meeting. Graphic by Naveen Kumar Saini/Mint
The chart shows that, assuming they do raise the interest rates on 15 March, the probability of the next rate hike goes beyond 50% by the US Federal Reserve’s June meeting. Graphic by Naveen Kumar Saini/Mint

The markets are expecting three hikes in the federal funds rate this year, with an 88.6% probability of the rate being increased to 0.75-1% on 15 March from 0.5-0.75% currently. The chart has the details.

The chart shows that, assuming they do raise the federal funds rate on 15 March, the probability of the next hike goes beyond 50% by the US Federal Reserve’s June meeting. And assuming that a hike comes through in June too, then the next hike will have a probability of more than 50% in December this year. That means the market is expecting three hikes in the federal funds rate this year, with the rate at 1.25-1.5% in December 2017.

An increase in US interest rates is generally positive for the dollar and a stronger US currency could mean that the dollar returns from emerging market assets could be lower. But there could be many countervailing factors that outweigh this effect. For instance, the Fed raised interest rates by 25 basis points last December, but the dollar has weakened since then. The dollar/rupee was at 68.775 on 28 November 2016, compared to around 66.605 now. Emerging market equities have rallied this year, in spite of the Fed rate hike last December.

Much also depends on whether the markets believe that the US growth is getting stronger. If it is, then the impact of interest rate hikes is expected to be benign, as was the case during the boom of 2004-07

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