That time of the year is here again, and the Feds look set for third interest rate hike for fiscal 2017 as 2018 approaches in full bloom. Pundits have been up and about with high expectations of an inevitable rate hike, but, if this will be so, remains to be seen.
The Background to the Feds Rate Hike Scenario
The American economy has seen a strong rate in 2017 with such figures that readily draws attention. This has been evident in the GDP figures:
First quarter GDP: 1.4 percent
Second quarter 2017 GDP: 3.1 percent
Third quarter 2017 GDP: 3.3 percent
These figures also showed up in the rise in personal income by 0.7 percent as the second quarter closed. It was already figured out that real GDP growth was strong across the states, giving fillip to a rise in disposable income and purchasing power.
Technically, the US Dollar was under pressure this week so far, and EUR/USD managed to move higher. The pair might continue to move higher and depending on the Fed interest rate decision, there can be swing moves in the US Dollar in the short term.
The Inflation Effect and Interest rate Hike
On the back of a strong performing economy, there was no doubt that more money became available to go after goods and services. Surprisingly, while this should have led to rising inflation, it curiously did not, with the numbers remaining flat during the year.
As the inflation rate refused to pick up momentum, many watchers of the Feds wondered what step was next in line.
The most recent minutes of meeting of the feds showed that even the players where really at a loss as to the need for a rate hike. The knee-jerk action expected was to force inflation rate to about 2 percent with no hesitation, but, how will this get done?
Interest rates will not be hiked for the fun of it as the last Fed meeting in September evidenced. While some of the decision makers want a hike to prevent asset bubbles, others wanted a near-infinitesimal change or maintenance of the status quo.
The Feelers from the Feds
While the Fed Chair has voiced support for rate hikes, the majority in the board want at least a jolt of 1.5 percent for December 2017. In reviewing the Fed board, it has become clear that there was a segment that wants a hike if the medium-term stats look durable.
The next segment is made up of data pushers who want to be sure that the figures bandied come out to justify an interest rate hike. On the last rung of the Feds are those who prefer a waiting approach till the 2 percent benchmark is breached before a rate hike gets implemented.
In view of the strong points marshaled by the members of the monetary and fiscal team, it is expected that if a hike gets the nod, it will be within the 15 percent basis points range.