FXStreet (Delhi) – Research Team at BBH, suggest that many still are unconvinced that the Fed will hike in the middle of December and some argue against it on technical grounds.
Key Quotes
“Raising rates in so close to the end of the year may inject extra volatility into the markets and complicate year-end activity. As a matter of fact, the Federal Reserve has taken action in the month of December. It hiked rates in December 2004 and December 2005, for example. It cut rates in December 2001 and December 1995.”
“If one assumes that Fed funds, which have been averaging 13 bp over the past 50 and 100 days, continues to do so in the first half of December, and then after the rate hike averages 30 bp, then the December Fed funds contract is pricing in a 75% chance of a hike. Some assume that it will average the middle of the range, but besides the fact that it has been averaging around the middle of the range now, there is no compelling argument to assume this remains the case.”
“Indeed, we suggest the possibility that in order to maintain maximum control, the Fed will want to provide sufficient liquidity to keep the Fed funds rate relatively low to ensure the attractiveness of one of the new tools in this cycle, the interest paid on excess reserves (which is the top of the Fed funds target range). It is true that no one really knows where Fed funds will trade after the hike, and we need to take the “odds” only in the context of that assumption. Our work suggests that the conventional measure may under-estimate the market-based probability of a Fed hike in December.”
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