December Rate Hike, a Possibility According to the US Federal Reserve

Deferred US interest rates futures rose on Thursday as traders added bets that the U.S. Federal Reserve would raise interest rates very gradually after it ends is near-zero rate policy, possibly as early as December. According to the minutes, the USA was able to survive the seesawing global markets without any stress. A couple of officials anxious that it might be signaling too strongly the possibility of a December rate hike.

The positive reading boosted regional markets with equities rallying Thursday after a surge on Wall Street, while emerging market currencies were lifted by a more confident view of riskier, higher-yielding, assets.

The minutes showed that barring “unanticipated shocks”, rates would rise in December for the first time since 2006.

William C Dudley, the president of the Federal Reserve Bank of NY, who has emphasised the importance of preparing financial markets for liftoff, said on Wednesday before the publication of the minutes that it appeared investors were ready for the Fed to start raising rates.

“Most [officials] saw the downside risks arising from economic and financial developments overseas as having diminished and judged the risks to the outlook for domestic economic activity and the labor market to be almost balanced”. The dollar’s weakness despite stronger signs of an impending rate hike in the USA indicated that investors have already expected the rate increase next month, Mizuho Bank said in a commentary.

In particular, Fed officials said the jobs market is improving and inflation is starting to move towards their 2 per cent annual target.

“We just have to turn this aircraft carrier around, get out of this zombie-like economy which is being fed on an elixir of low interest rates and get to a process of normalisation”, he said.

“I believe it will soon be appropriate to begin a new policy phase”, he said, adding he will monitor economic data between now and a meeting on December 15-16, for which he has a vote on policy.

“Clearly the removal of the uncertainty around the USA rate hike is seen as being far more preferable to investors than keeping them at record lows for a little longer”, said Craig Erlam, senior market analyst at Oanda trading group.

However the minutes also exposed continued divisions among Fed policymakers, with some warning that it was “unlikely” that information available by December would support an increase. The S&P 500 benchmark index plunged 20 percent in the 12 months following the initial rate move. Indeed, the divergence in policies across central banks and financial tightening in the USA requires a cautious approach to ensure that the actions do not result in unnecessary tensions.