Fed’s Williams: Strong case for December rate hike

Commodities tumbled on Monday after John Williams, president of the Fed Bank of San Francisco, said at the weekend that there was a “strong case” for a USA rate hike at the Fed’s last meeting of 2015.

The likelihood of higher rates by year-end is 68 percent, up from 50 percent at the end of October, futures data show.

The decision to delay raising rates has helped offset headwinds caused by a strengthening U.S. dollar, Fed Vice Chairman Stanley Fischer said in a November 12 speech. “Liquidity is beginning to dry up as people are waiting for what happens in December with the Fed”. That said, there are global developments – a hard landing in China with serious contagion to global markets, for example, or a geopolitical explosion in the Middle East – that could persuade the Fed, on risk management grounds, to keep rates unchanged. And the decisions made at the U.S. central bank are very dependent on economic numbers in the that country, such as unemployment figures and inflation, which can not be predicted. Along this path, rates rise by about 100 basis points in 2016 and by another 100 basis points in 2017.

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. “It would send completely the wrong message to the markets”.

In the 2004-2006 cycle, the Fed, under Alan Greenspan and later Ben Bernanke, raised rates 17 times in quarter-point increments and at the time announced it expected to remove accommodation “at a pace that is likely to be measured”.

“I do worry because of the episode of the mid-2000s of locking ourselves in, just because we did something two or three times in a certain way”.

Yellen, Fischer and others at the Fed insist that any tightening is likely to be gradual.

Wall Street capped its best week all year on Friday, shaking off the horror of attacks in Paris and Mali on expectations the Federal Reserve is confident enough in the world’s top economy to raise interest rates next month.

“Now that the Federal Open Market Committee (FOMC) has settled the question about timing, the new parlour game for financial markets will be about the slope of the trajectory of the rate increases”, Citigroup chief economist William Lee wrote in a report.

Still, uncertainty remains over the pace rates will rise given the U.S.’s tame inflation outlook. But he has warned that declining estimates of neutral rates – those that neither accelerate nor slow the economy – are a “red flag” that the economy could have become more vulnerable.

Current interest rates are, 0.75% for primary credit, 1.25% for secondary credit and 0.2% for seasonal credit and FED funds rate is at 0-0.25%.