Our forecasts anticipate the Fed to set the fund rate between 1.0 per cent 1.25 per cent by the end of calendar 2016 and by an additional 50 basis points by end 2017.
The ongoing slowdown in China (and other emerging markets) added is likely to provide ongoing headwinds to growth and inflation over the medium term, leaving the risks skewed towards a more drawn out recovery in inflation, especially given persistent oversupply in key commodity markets.
For its part, the Fed said the timing and size of potential future adjustments would likely be reliant on “realised and expected economic conditions relative to its objectives of maximum employment and two percent inflation.”
Any move will be gradual, although the way markets are currently interpreting the word is clearly creating tension, with the US yield curve implying rates well below what the Fed is currently forecasting over the next few years.
We expect markets to be very sensitive to the news flow in the US between now and mid-to-late March. The next Fed meeting is in late January which seems too early for markets to focus on. But if the data and Fed rhetoric suggests March is possible for the next hike, then the slope of the Fed’s trajectory is starting to look quite different from the market's current sense of gradual.
Tom Kenny is a senior international economist at ANZ