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Wall Street Sees A 60% Chance Of A December Rate Hike

Wall Street Sees A 60% Chance Of A December Rate Hike
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Fed Chairman Janet Yellen’s recent remarks are being interpreted by the market as “slightly hawkish,” with a mention of a probable rate hike in coming months, BofA Merrill Lynch’s Emanuella Enenajor said in a report. She added that the market continues to view the probability of a December rate hike at roughly 60 percent.

Higher Chances Of December Than September

Fed Chair Yellen’s speech on “The Federal Reserve’s Monetary Policy Toolkit” echoed comments made by other FOMC members on a probable rate hike this year. She mentioned that the case for a hike had “strengthened in recent months,” with the Fed getting closer to its inflation and employment goals.

On the other hand, Yellen noted uncertainty with the economic data and did not mention a specific timeframe for the rate hike, analyst Enenajor pointed out. “In our view, the speech marginally increases the risk of a September hike, but our base case is still for the next hike in December.”

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Although Fed Chair Yellen’s remarks were slightly hawkish, “her reiteration that the outlook is data dependent and the fact that she didn't strongly advocate for a September hike left the OIS market continuing to price relatively low chances of such a move,” the BofA Merrill Lynch report stated.

The market assigning a probability of about 60 percent for a December rate hike seems appropriate, since there could be an increase in uncertainty heading into the election, the analyst commented.

“Longer-dated Treasury yields declined after Chair Yellen's remarks largely as a result of the continued discussion of near-term policy tightening which caps any sustained increase in longer-dated breakeven rates of inflation,” Enenajor wrote.

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