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Is a US interest rate hike on the cards in December?

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The US central bank has kept interest rates on hold at its latest meeting but experts believe a hike could still happen in December.

The Federal Reserve’s latest decision came with minimal surprise, and as was the case in September just one policymaker within the Federal Open Market Committee, Jeffrey Lacker, voted in favour of a rise.

Short-term interest rates in the US have been at record lows, pegged at 0 to 0.25 per cent, since December 2008.

In a statement, the FOMC said that it continues to see the risks to the outlook for economic activity and the labour market as finely balanced but is “monitoring global economic and financial developments”.

It added: “Inflation is anticipated to remain near its recent low level in the near term but the committee expects inflation to rise gradually toward 2 per cent over the medium term as the labour market improves further and the transitory effects of declines in energy and import prices dissipate.”

While many expect the Fed will raise interest rates at its next meeting, some economists still feel monetary policy will not begin to tighten until next year.

Capital Economics chief US economist 
Paul Ashworth believes while there is a possibility that the Fed will increase in December, he thinks it is more likely to wait until early next year.

He said: “Our view is still that the November and December employment reports won’t be strong enough to convince a majority of the FOMC members to back a rate hike, but December obviously isn’t out of the question.

“In addition, even though third-quarter GDP growth might now be as strong as 1.8 per cent annualised with strong gains in consumption and investment, most of that growth occurred at the start of that quarter. There has been a notable softening in September’s activity data.“

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  1. The longer the Fed holds off the bigger the problem it is creating. We could end up seeing a Japan-style situation, where the Fed is led by share markets and the economy rather than the other way around. By holding off again and again they are reducing confidence, increasing uncertainty and perpetuating the fear that the Fed knows something we don’t know.

    Interestingly, US consumers will not feel the pinch as quickly as UK consumers following a rate hike. This is because most US household debt is fixed rate whereas most UK household debt is variable rate. Actually most US household savings are variable rate, so if anything they might see a slight average increase in household wealth/income following a rate change.

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