According to the minutes of the Fed’s October statement, most FOMC participants expected economic conditions necessary for a liftoff from crisis-era interest rates “could well be met” by its December meeting. They took note of the US economy’s resilience through a summer of financial market turbulence and felt that global threats had “diminished”. The calculation is based on the assumption that the effective fed funds rate will average 0.375 per cent after the first increase.
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The minutes of the October meeting showed that Fed officials think the the job market would improve further and that inflation would begin to move toward their 2% target.
“The US 2-year rates are higher, as the market prices a hike in with increasing confidence, but 10-year yields are a couple of basis points lower, and equity indices are higher”. “December 16 is a very, very live date for action, and frankly, given the stellar 271,000 jobs report since the October meeting, we would be astounded if they don’t raise rates finally”, he said. Lee Hardman, currency analyst at Bank of Tokyo-Mitsubishi UFJ, said comments from Fed officials that raising rates early could limit future rises weighed on the US currency. The positive reading boosted regional markets with equities rallying Thursday after a surge on Wall Street, while emerging market currencies were also higher as dealers became more willing to buy riskier, higher-yielding, assets.
Many investors had expected the Fed to lift off in September, but the central bank hesitated amid concerns about a hard landing for China’s slowing economy and the wild swings in financial markets that followed.
“In the relatively near future probably some major central banks will begin gradually moving away from near-zero interest rates”, Fed Vice Chairman Stanley Fischer told the San Francisco Fed’s biannual Asia Economic Policy conference.
The December Fed funds contract implied traders see about a 68 percent chance the Fed will raise rates next month, little changed from Wednesday’s close.
The House is scheduled to vote this week on the Fed Oversight Modernization and Reform Act, which would require the Fed to adopt a mathematical formula for determining the appropriate level for its benchmark short-term interest rate, which influences other borrowing costs across the economy.
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Once rate hikes start, he said, the Fed will reassess conditions at each meeting and will pause further rate hikes if needed. The Taiwan dollar, Thai baht and Singapore dollar also advanced.
