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Fed: Gradual means 4 and is data-dependent - Rabobank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 17, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Philip Marey, Senior US Strategist at Rabobank, notes that as widely expected (although not until recently), the FOMC decided to raise the target range for the federal funds rate to 0.25%-0.50% from 0.00%-0.25%.

    Key Quotes

    “In order to actually get the fed funds rate in that range the Fed also raised the IOER (interest on excess reserves) rate to 0.50% from 0.25% and it set the new ON RRP (overnight reverse repo) rate at 0.25%.

    The FOMC judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to hike.

    Gradual means 4

    The FOMC statement stressed the gradual nature of the hiking cycle twice. Firstly, it said that the Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen. Secondly, it said that the Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.

    The FOMC projections show what is currently meant by ‘gradual’. The dot plot implies 4 rate hikes of 25 bps in 2016 and another 4 in 2017. This means that the FOMC has removed 1 hike from 2017 compared to September, but still has kept the same amount of hikes for 2016. So ‘gradual’ means 4 in 2016 and 4 in 2017.

    However, the statement also stressed data dependency twice. Firstly, it said that in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. Secondly, it said that the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
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