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Fed surprises with hawkishness as rates put on hold

The FEDAmerica’s Federal Reserve bank continued to taunt investors with the prospect of a rate hike yesterday, increasing expectations for higher rates by the end of the year.

A Fed policy statement yesterday, which left interest rates unchanged, was nevertheless “very explicit” in saying that the Federal Open Market Committee (FOMC) will consider raising rates in December, says Ken Taubes, head of US investments at Pioneer Investments.

Rates have been in the region of 0-0.25% since December 2008.

Patrick Schotanus, investment strategist at Kames Capital, says the hawkish tone of the Fed yesterday was a surprise.

“As expected, yesterday the US Federal Reserve kept its interest rate stable. What was surprising was the hawkish tone of the accompanying statement, particularly compared to the previous September comments.

“The shift in language included a more upbeat assessment of spending and investment and the removal of the previous reference to the potential risks of global and economic developments. It also changed the wording of its forward guidance.”

He adds that market reaction has been clearly reflected in the implied probability of a rate rise at the next FOMC meeting in December. The implied probability increased from roughly 35% to 48% this morning (Thursday, October 29).

Taubes, at Pioneer, also says: “Overall, the statement was a little more hawkish than people were expecting. The Fed has a little more confidence in the economy than the current market view. We may see more near-term volatility as the market prices in the Fed’s potential rate increase. But, the Fed is not going to tighten so much to slow the economy.”

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