Fed rate hike strongly expected

A rise in US interest rates by the Fed on Wednesday is priced in by the markets. The outlook for rates in 2018 will be the talking point.

A rise in US interest rates is a certainty, according to the markets. The Federal Open Market Committee (FOMC) decision is announced at 7pm (UK time) on Wednesday 13 December.

While economic activity is rising, which would justify tightening, commentators are worried about the lack of inflation. Still just over 99% in the markets are expecting a quarter point rise with the rest forecasting a half point increase.

Inflation should be rising, with US unemployment at its lowest since the 1990s, according to the empirical Phillips curve, but there is little sign of that coming through.

The Federal Reserve (Fed) funds target rate is now at 1%-1.25%, and the Fed has also started reducing its $4.5 trillion balance sheet by $10 billion a month. But despite this, monetary conditions have loosened rather than tightened.

The FOMC’s so-called 'dot plot' will also be released, which will give an indication of how the rate setters are viewing interest rate outlook in the coming year with their new chair, Jerome Powell.

Jeremy Naylor looks at how to trade the FOMC decision, above, saying the rate rise is pretty much priced in. It all depends whether the outlook for rate rises next year is steeper than expected. That could put a dampener on the buoyant stock market.

The decision will be covered live for IG clients in the platform from 6.45pm (UK time) on Wednesday, where Jeremy Naylor will be joined by Nick Parsons, from Simply Macro, and Chris Beauchamp, from IG, to discuss the implications of the decision and outlook, as well as the market reaction.

Find out more about the significance of the Federal Reserve meeting, and see an example of this live coverage

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