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FOMC set to raise rates again at its upcoming December meeting - Nomura

In view of analysts at Nomura, the FOMC appears set to raise rates again at its upcoming December meeting.

Key Quotes

“With continued stronger-than-expected and above-trend economic growth, some recent recovery in inflation, and financial conditions that have remained very accommodative, we now expect more interest rate hikes next year and in 2019. In particular, we now expect the Federal Reserve to raise short-term interest rates three times next year and once in 2019.”

“Since Q2, the US economy has consistently shown more positive momentum than we expected. Indeed, later this week we expect the BEA to report that GDP grew at a rate of about 3-1/2% in Q3 after posting growth of 3.1% in Q2.”

“Moreover, a variety of indicators point to continued robust growth at the beginning of Q4.”

“Labor market data suggest that the US economy is, at a minimum, close to full employment. Continued above-trend growth will tighten labor markets further.”

“Over the next year we expect inflation to move back up towards the trajectory it was on before the slowdown in March. The rebound in inflation in recent months is likely to give the FOMC some confidence that with labor markets continuing to tighten, inflation should move up towards their 2% target.”

Trajectory of Policy

With the combination of momentum in aggregate demand, tightening labor markets, some evidence of a rebound in inflation, and resilient financial conditions, we think the FOMC will raise short-term interest rates somewhat more over the next two years than we had expected before. Beyond the expected hike in December, we now expect three hikes next year – in March, June, and December – and one more hike in June 2019. This pace of hikes is in line with the current median of FOMC forecasts through mid-2019. That said, we do not expect FOMC to raise its range for the federal funds rate above 2.25-2.5%. Note that we think this would still be a small overshoot relative to the longterm level of the “neutral” rate.”

“We do not expect any change to the current trajectory of the FOMC’s balance sheet policy.”

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