At next week’s FOMC meeting, which concludes on 16th December, the Fed is now almost universally expected to raise the fed funds rate by 25 basis points, to a range of between 0.25% and 0.50%. In the accompanying statement the Fed will stress again that the pace of additional rate hikes is likely to be unusually gradual. But as Fed Chair Janet Yellen has acknowledged, the future path of interest rates will be entirely data dependent. We believe that a bigger-than-expected rebound in inflation next year will force the Fed to abandon its gradualist philosophy, with the fed funds rate rising to nearly 2.0% by end-2016 and nearly 3.5% by end-2017.
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