Since mid-year, incoming data have generally improved and external risks have diminished considerably. Chair Yellen now believes that the economy has likely met the criteria set out in the November FOMC statement for a rate hike. We find the chair’s statements consistent with those of other FOMC members and we expect that the FOMC will increase its policy rate by 25bp at the time of its December meeting.
However, her hesitance to speak too strongly over the hike and her qualifiers when discussing the possibility of a rate hike indicate a very low likelihood of any acceleration in the pace of hikes. We continue to be comfortable with our two rate hike call for 2017, September and December, and see relatively low risks of a faster pace of hikes in 2017.
While concerns about inflation likely persist in the minds of several FOMC participants, PCE inflation, on a core and headline basis, has continued to firm. We continue to expect inflation to move higher this year and we see many of the incoming administration’s economic proposals as likely to boost inflation further in 2017 and 2018. Financial conditions also provide room for the FOMC to hike.
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A December rate hike is nearly fully priced by markets and almost all economists, who have made public their expectations, believe that December is likely. The financial market reaction to the surprise outcome of the US election was also generally positive, and while higher interest rates and the substantial appreciated dollar have tightened financial conditions since the September meeting, conditions remain accommodative.