Three Fed rate hikes tipped for 2016

Pimco’s ‘base case’ for this year sees the US Federal Reserve raising interest rates three times in 2016 – although that could change based on labour market trends, inflation and financial conditions.

Richard Clarida, global strategic advisor at Pimco, noted that the minutes of the Federal Open Market Committee’s December meeting said the ‘lift off’ trajectory for this rates cycle would be ‘gradual’ – a word that was used 15 times in total.

The Fed is taking is slowly for three main reasons, Mr Clarida said.

“First, the Fed sees downside risk to its inflation projections and wants to monitor closely ‘actual inflation’ as well as measures of ‘inflation compensation’,” he said.

Second, the minutes restated the Fed’s belief that there is a new ‘neutral’ for the appropriate policy rate which is well below pre-GFC levels.

“Third, the Fed spent more time than I expected at a meeting where it decided to hike for the first time in nine years discussing the ‘asymmetric’ risks it faces by lifting off with inflation below target and global growth slowing,” Mr Clarida said.

When it comes to the number of hikes expected in 2016, Fed vice chairman Stanley Fischer said the four hikes indicated by the Fed’s famous ‘blue dots’ in the December Summary of Economic Projections are “in the ballpark”.

“Our baseline view at Pimco remains that we will see fewer than four hikes in 2016, but likely more than the market is currently pricing in,” Mr Clarida said. “Fed policy going forward, the minutes remind us, will be ‘informed by incoming data’.

“There will be plenty of data between now and March (certainly there is no indication that the Fed will make any changes to policy at its January meeting), and the inflation data as well as the GDP data will be followed closely by the Fed – and the markets.”

[Related: Fed rate hike won’t force RBA’s hand, says economist]