Investors are grappling with how limited the next set of Fed interest rate increases may be

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Ahead of next week’s Federal Reserve policy meeting in Washington, investors are already grappling with what the US interest rate-hike cycle will look like in the coming years, with some pointing to the 2015-2018 campaign. That’s how shallow and short-lived it can be.

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The year 2018 was the last time that Fed officials were able to make multiple rate hikes in a single year, and at the time, the US was still in its longest economic expansion on record. By 2019, policymakers were concerned about the risks of a recession and, instead of going further, they cut three so-called “preemptive” rates to avoid a recession. The US economy then started contracting in February 2020 as a result of the spread of the coronavirus.

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Most of the focus for the December 14-15 meeting of the Federal Open Market Committee in Washington will now, of course, be on efforts to pull back from extraordinary pandemic-era monetary stimulus. With how quickly the central bank will reduce monthly bond purchases and the timing of the first rate hike, the next obvious question for investors is where the fed funds rate target will end, given that the US is now in a period of persistently high inflation. Chances are higher rates are needed.

BMO Capital Markets analysts Ian Lingen and Ben Jeffery wrote in a note, “There appears to be a marked divide between those looking to the prior cycle as a guide to what is practically achievable and those looking to the policy response.” The hopeful camp will eventually need to be more robust.” Tuesday.

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The former group is of the view that the Fed’s ‘long-term’ projection of 2.50% is too ambitious, while the latter group expects the realities of upside risks to inflation to require a terminal 3-4% ,” They said.

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During the Fed’s previous rate-hiking cycles, policymakers tried to raise the fed funds rate target from zero to 0.25%, where it had been held since December 2008. The officials managed to raise the target only once, to 25. basis points, 0.25% to -0.5% in December 2015. Then, he waited a full year before raising rates again by 25 basis points to 0.5%-0.75% in December 2016.

It wasn’t until 2017 — or more than eight years before the Fed funds rate target had fallen to near zero — that Fed officials felt confident enough to raise rates more than just once: they did three times that year. did so. Then, in 2018, policymakers raised rates four times, moving the fed funds rate target to 2.25%-2.5%.

But instead of raising rates even further in 2019, he backtracked and tripled borrowing costs, moving the fed funds rate target back to 1.5%-1.75%. The target was further reduced to almost zero in March 2020, as the COVID-19 coronavirus turned into a global pandemic.

Now, analysts say both the economic recovery and financial markets are in a somewhat fragile state towards the end of the year, when liquidity could lead to large volatility in assets, such as government bonds.

FHN Financial is one of those firms that sees the fed funds rate target as likely to be stuck below 1.25% through December 2024, meaning the Fed hikes four times by just 25 basis points, FOMC officials said. Against an average forecast of 1.8%. Then. Fed officials’ long-run average forecast for the target is 2.5%, the highest level the policy rate has reached during the previous rate-hike campaign.

“People think the Fed is being forced to face high inflation, and probably doesn’t have the strength to meaningfully tighten the economy,” said Tom Graff, head of fixed income for Brown Advisory in Baltimore. “A lot of things can happen next year, with the Fed tapering or hiking rates just once. But if it’s clear the economy is slowing after that, maybe the Fed moves quickly to the sidelines or maybe it’s going to cut rates. makes cuts.

On Tuesday, 2-year TMUBMUSD02Y,
10-Year TMUBMUSD10Y,
and the 30-year Treasury yields TMUBMUSD30Y,
Everyone stressed on alleviating the apprehensions about the Omicron type of coronavirus. Dow Industrials DJIA,
rose nearly 500 points, and the Nasdaq Composite Index comp,
rose 3%.


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