REPORT
By Gülbin Yıldırım
U.S. letter, week beginning Dec 12

- Fed is expected to raise interest rate

This week all eyes will be on the U.S. Central Bank’s Federal Open Market Committee Meeting (FOMC).

The Fed is widely expected to move ahead with the rate hike which has been long postponed due to the economy’s sluggish performance in the first half of the year, followed by the disappointing May employment data and the U.K.'s Brexit referendum, and finally the presidential elections.

Now the main rationale for the rate hike is the solid momentum gained in the economy in the second half the year, with November employment and inflation figures believed to give the Fed the last necessary “Green Light.

"The U.S. economy and financial markets are cooperating, and the expectations for a rate hike are exactly where they want them to be. I think the Fed has no reason not to raise interest rates in December, “Moody’s Analytics Director Ryan Sweet told Anadolu Agency on Friday.

All in all, the Fed faces a big “Deja vu" moment as it is expected to repeat 2015 with only one rate hike at the last meeting of the year.

 

-Markets will focus on projections and “dot plot”

Since the markets have already priced in the widely expected rate hike, this time the focus is likely to be on the economic projections and the remarks of Fed Chair Janet Yellen after the FOMC’s announces its decision at 14.00 ET on Wednesday.

The radical fiscal policies promised by President-elect Donald Trump are the reason why the economic projections of the FOMC are to be watched with greater attention than usual at this meeting.

The markets are pondering whether the Fed’s projections will show an increased expectation for economic growth and inflation due to Trump's proposed tax cuts and infrastructure investments.

The previous "dot plot", which was updated in September, showing where each FOMC participant thinks the Fed funds rate should be at over the next few years, pointed to two interest rate hikes of 25 basis points in 2017. Some analysts estimate that the number of rate hikes expected might go up to three to four from two.

If the projections or if Yellen indicate a faster tightening than anticipated in the next meeting, the appreciation of the dollar and drop in gold prices may continue. In addition, short-term volatility may be observed in global stock markets.

 

- Trump's reaction to rate rise will be curious

Another curious issue about the Fed's interest rate hike is how president-elect Donald Trump, soon to be the 45th president of the United States, will react to the decision.

Trump repeatedly accused the Fed of "keeping interest rates low to help the Obama administration" during the election campaign, but he has kept quiet about the Fed since the day he was elected.

 

This silence was interpreted as "the presidential candidate Trump and President Trump having different preferences on monetary policy."

Let's see if Trump will make an assessment on his Twitter account after the Fed's interest rate decision. 

12 Dec,2016

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