US Fed’s interest rate path

US Federal Reserve’s 25 bps rate hike was in line with expectations and largely priced in by financial markets, but that doesn’t make the future path more certain


The US Federal Reserve chair Janet Yellen. The US central bank is now expected to go for three rate hikes in 2017 compared with the earlier projection of two quarter percentage point hikes. Photo: Reuters
The US Federal Reserve chair Janet Yellen. The US central bank is now expected to go for three rate hikes in 2017 compared with the earlier projection of two quarter percentage point hikes. Photo: Reuters

The decision of the US Federal Reserve to raise rates on Wednesday was in line with expectations and was largely priced in by financial markets. But this does not make its future path more certain. The US central bank is now expected to raise rates thrice in 2017 compared with the earlier projection of two quarter percentage point hikes.

The incoming Donald Trump administration is expected to pursue an expansionary fiscal policy which could result in higher inflation at a time when labour market conditions are tightening. That’s not all. Rate hikes by the Fed will further increase the policy divergence between the US and other industrial economies such as the euro zone and Japan. Expectations of higher growth and higher interest rates are likely to accelerate the flow of capital to US assets, making the dollar more expensive. This will at some point start affecting economic activity in the world’s largest economy.

Some of these factors will complicate the Fed’s future rate path and keep markets guessing.

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