Deutsche Bank Defends Fed, Says Rate Hike Is Not A Mistake

Will the Fed hike its rates in December?

Most market participants have concluded that it is merely a matter of when – and not if, the Fed will raise the federal funds rate. According to a new research report by analysts at Deutsche Bank, the first rate hike since 2006 will be finalized during the Fed's upcoming December 16 meeting.

Previous Concerns 'Largely Dissipated'

The report argued that the U.S. economy is strong enough to withstand higher rates, despite "lingering concerns" that the shift in policy is a "mistake." The report noted the shocks that prevented the Fed from acting in June and September have "largely dissipated."

Related Link: Jobs Report May Have Cinched Fed's Rate Raise

As an example, ahead of the September Fed meeting, market participants observed "some slowdown" in labor market and "little evidence" of wage inflation. The current conditions indicate a "strong rebound" in the labor market and a "pick-up" in wage inflation.

2016 Will See Multiple Hikes

Following the initial December rate hike, the Fed is expected to gradually raise rates even further throughout 2016 as it "assesses the economy's reaction" to the policy tightening. The report added that the Fed may initiate more hikes in the first half of 2016 versus the bottom half.

"From a markets perspective, the repricing of the Fed's rate path could lead to a tightening of financial conditions – this is especially true if the Fed decides to taper its reinvestment policy," the report argued. "These factors combined could lead the Fed to pause briefly in the second half of [2016]."

Initial Reaction

Finally, the report argued that given the "widespread agreement" of an imminent Fed rate hike, a strong initial market reaction is unlikely. Moving past the first rate hike, the outlook for risk assets will be "determined by how the disagreement between the market and the Fed about the pace and extent of hikes get resolved."