But now with the election behind us and financial markets reacting so favourably to the incoming administration, the takeaway is that the December hike is coming our way. Arguably what is most important for the Fed is to make the expansion going as long as possible. Since the labour market is operating close to its capacity, to prevent overheating employment growth must slow down significantly before long. Indeed, many Fed officials saw stability risks and suggested that the risks to the outlook would likely increase without rate hikes. Credibility concerns were at play too; some participants noted that to preserve credibility a rate increase should occur at the next meeting. Meanwhile the reason for not hiking at the November meeting already was that the majority of members wanted more evidence of progress on the inflation front. What difference could a month possibly make?
In any event, markets are speculating that Donald Trump’s reflationary policies will mean a quicker pace of US monetary tightening and a hike at the December meeting is fully discounted; recent speeches from Yellen and Fisher have not suggested otherwise either. [SEB]