Feds rate hike likely next year

NEW YORK, Nov 18 (Reuters) – Longer-dated U.S. Treasuries fared better than shorter-dated issues on Wednesday after the release of the minutes of the Federal Reserve’s policy meeting in October signaled a likely glacial rise in interest rates once liftoff begins.

In the end, the Fed at its October 27-28 meeting left its key rate unchanged but said further progress could justify a December hike. A couple of officials anxious that it might be signaling too strongly the possibility of a December rate hike.

A few wanted to raise rates at this meeting, while most participants anticipated that these conditions for tightening could well be met by the December 15-16 meeting.

Most Fed officials think the economy will be ready for higher rates, the Fed said in its latest salvo, an official account of its October policymaking meeting, which it published Wednesday.

While higher rates would raise borrowing costs for companies, the firming outlook has erased a few of the uncertainty that triggered market volatility in recent months, said Chris Weston, an analyst at brokerage IG. Fed officials emphasize that they plan to retreat gradually, because the economy remains relatively weak.

They also judged the risks to the outlook for domestic economic activity and the labor market to be almost balanced.

However, the Fed minutes indicated that officials felt the United States had come through these difficulties. Atlanta Fed president Dennis Lockhart, sitting alongside her on a panel in NY, said global financial markets have settled since the August turmoil that caused the US central bank to delay raising rates.

The debate took the form of a discussion of the equilibrium real interest rate – the policy rate, net of inflation, that would be consistent with full employment and the Fed’s 2 percent inflation goal. Fed officials reiterated last month they believe inflation is largely being tempered by low energy prices and a strong dollar – effects they expect to dissipate.

William C. Dudley, president of the Federal Reserve Bank of NY, said he did not think markets would be surprised when the Fed starts raising rates. In the report of the meeting the FOMC noted that the Fed staff continues to project real GDP expansion through 2018 at a somewhat faster-than-normal pace supported primarily by consumer spending.

Even a few “dovish”, or pro-growth Fed policymakers recently said the time for moving away from near zero rates is approaching.