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Will We See a Rate Hike in December?

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To hike, or not to hike?

Markets have turned volatile once again on speculation as to whether the Federal Reserve will raise rates during its December meeting. Major banks (XLF) with high interest-related income, like Wells Fargo (WFC), Bank of America (BAC), J.P. Morgan (JPM), and Citigroup (C), have been struggling with compressed margins and are eagerly awaiting a rate hike.

On Thursday, Janet Yellen, head of the Federal Reserve, came across in favor of a rate hike in December. Citing dangers of waiting too long, she said, “Were the FOMC to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the Committee’s longer-run policy goals” for inflation and jobs. “Moreover,” she continued, “holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability.” The committee’s next meeting is scheduled for December 13–14.

Yellen also said the US economy is on track for growth but still “has a bit more room to run.” Inflation has picked up, and GDP growth and consumer spending trends are favorable.

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“With the federal funds rate currently only somewhat below estimates of the neutral rate, the stance of monetary policy is likely moderately accommodative, which is appropriate to foster further progress toward the FOMC’s objectives,” she said. Despite an unemployment rate of 4.9%, Yellen expects more improvement in the labor market. Currently, federal funds futures indicate at 94% chance of a 50–75 basis point rate hike in December.

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