When Will the U.S. Federal Reserve Raise Its Interest Rate?
A hike is approaching. In fact, an official from the U.S. Federal Reserve described the chances of a rate hike in December as plausible. The president of the Boston Fed, Eric Rosengren, who has generally advocated dovish interest rate positions, said a small hike has become necessary, giving its likelihood a 75% chance. (Source: “Fed won’t be easily swayed from December rate hike: Rosengren,” CNBC, November 15, 2016.)
The Federal Open Market Committee (FOMC), the body that determines monetary policy, will meet on December 13 and 14. If there is no bad economic news in the coming month, market forecasts that anticipate a rate hike in December are likely, according to Rosengren. (Source: Ibid.)
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Rosengren, a voting member of the FOMC, has typically supported low rates to promote economic growth. The fact that even he should come out in favor of a hike is indicative of its likelihood.
Rosengren already backed raising the rate in September, when the Fed left it unchanged. However, at the most recent monetary meeting, held at the start of November, Rosengren did not challenge the majority’s decision to maintain the status quo. He said that the committee was already moving in a rate hike direction in December. (Source: Ibid.)
Rosengren believes that the labor market in November showed it was close to full employment, which implies an unemployment rate of 4.7%. This is better than in October when it stood at 4.9%. He also believes that inflation is approaching the Fed target and is expected to reach two percent next year.
Rosengren’s rate hike assessment didn’t seem plausible just last week in the immediate aftermath of Trump’s election win. The markets initially reacted in a bearish way on November 9. That’s when U.S. government bonds were rising as a safe-haven against perceived volatility. There was a perception of a falling U.S. dollar. Instead the opposite has happened: the markets have stabilized. Some stocks even hit yearly records. So, monetary policy has shifted outlook radically in the span of less than a week.
Trump made no secret of his disagreement with Fed Chair Janet Yellen and other members of the FOMC. A rate hike in December might also help ease the relationship between herself and the new president.
