What do the markets expect from the FED?

After the Fed’s last rate hike, Fed Chairman Janet Yellen said that they will monitor economic data such as employment, growth and inflation for future interest rate decisions, and interest rate increases will be gradual. Based on these rhetoric, the Fed created the perception that it will increase the interest rate hikes by spreading over a longer term.

While Fed officials made pleased statements about the course of the economy before the interest rate decision on December 14, positive developments from employment and growth strengthen the Fed’s hand. In November, employment, in other words, the unemployment rate, reaching 4.6%, continues in the range of 4.5 – 5%, which the USA accepts as the natural unemployment rate. The growth rate for November came to 3.2%, revising itself above what is considered to be the US potential growth rate. Fed officials are confident that it is heading towards the target of 2% for inflation. They think that the evidence that inflation is heading towards the target is getting stronger.

On the other hand, what the new US president Donald Trump has promised; The Fed’s hand is relieved by its statements such as growth, reduction in tax rates and increasing infrastructure expenses. With the growth, in other words the increase in national income, per capita income will increase and people will buy more goods and services. With tax cuts, savings will increase and can turn into investments. With the increase in infrastructure expenditures, many workers will be employed and this segment with high consumption trends will stimulate the economy. If these policies come true, the employment and inflation rate in the USA will increase, so growth will begin to accelerate.

All these economic developments strengthen the possibility that the Fed’s interest rate hike possibility increases to 94% in December, and if the expectations are realized, it will increase the interest rate by 2 or 3 in 2017.

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