December Rate Hike In Sight With Expectations For A Slow, Gradual Trajectory Ahead
After quite a few false dawns of expecting interest rate hikes throughout the last 14 months (since the conclusion of the unconventional quantitative easing program in Oct 2014), the market is “sensing” that the Fed is finally on the cusp of normalizing the Fed Funds Target Rate (FFTR).
We are expecting the Fed’s rate liftoff to take place in the 15/16 December 2015 FOMC which is also the market consensus.After the expected first Fed rate hike in the 15-16 Dec 2015 FOMC, we believe the Fed will hike at a slow, gradual pace next year and we keep our rate hike trajectory projection, bringing the FFTR to 0.5% by end-2015 and another four 25bps hike in each quarter to bring the FFTR to 1.5% by end-2016.
We may have come to an interesting juncture of Fed monetary policy-making especially into 2016 where we may see more Fed Reserve Bank Presidents dissenting because they want to see higher rates but at the same time, we may see the first Fed Reserve Board Governor dissent since 2008 in the upcoming December 2015 FOMC because they favor easier policy for longer.
Indeed, based on the recent commentaries from the FOMC voters, if Fed Chair Janet Yellen chooses to propose a rate hike in Dec 2015, she is likely able to press ahead with majority support but she may not get an unanimous agreement as there are 3 clear doves: Fed Board Governor Lael Brainard, Fed Board Governor Daniel Tarullo and Chicago Fed President, Charles Evans.
Our base case scenario is 7-3 votes in favor of a 25bps hike in Dec 2015 FOMC. We may see the first Fed Reserve Governor dissent since 2008 in the upcoming December 2015 FOMC because at least two Governors favor easier policy for longer.