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It’s a well-worn adage that markets dislike uncertainty. In which case, they must be looking forward to next week’s Federal Reserve rate call.
According to Fed funds futures, the chances of a 25 basis point rate rise — taking it to 1.5 per cent — are almost at 100 per cent.
Such strong expectations have shifted attention toward what policymakers could say about the implications of US tax cuts for inflation, which has remained, restraining the outlook for the pace of rate tightening.
“With the House and Senate having now each passed broadly similar [tax-cutting] bills, it looks highly likely that a fiscal stimulus, worth up to $1.5tn over 10 years, will be in place by early next year,” points out Andrew Hunter at Capital Economics.
With “only a minority” of Fed policymakers having explicitly factored such a development into their economic and interest rate projections, Mr Hunter thinks the December meeting could offer up significant changes, despite the near certainty of a rise.
“There’s certainly a chance of the median projection of three rate hikes next year being revised higher, not least given that, since the September meeting, the centrist [policymaker] Stanley Fischer has been replaced by the more hawkish Randal Quarles.”
CapEco says it would take only three Fed officials to up their predictions of three 2018 rate increases for the median rate forecast for December 2018 to reach 2.1 per cent. There will still be much to look for around the next meeting. Any sense of certainty only extends so far.
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