How Past Fed Rate Hikes Moved Markets

December 02, 2015

A rate hike is coming. With only a little more than two weeks until the Federal Reserve's next monetary policy meeting, all signs continue to indicate that the central bank is set to finally increase its benchmark overnight interest rate for the first time in 9 1/2 years.

The only thing that would stop the hike, say analysts, is a surprisingly bad jobs report this Friday. And by bad, they mean really bad.

"...(Y)ou need a number like 50,000 or 75,000 for the Fed not to go in December. There's a low bar for this report to clear," Michael Gapen, Barclays’ chief U.S. economist, told CNBC. That would be well below the 200,000 jobs that most economists are expecting the government to report at the end of the week.

The Hope Of Gradual Rate Hikes

Assuming the jobs report doesn't shock to the downside, the Fed will likely raise the Fed funds rate by 25 basis points on Dec. 17. The Fed has promised that the pace of future rate increases beyond the first will be "gradual."

What a "gradual" pace means is something that Fed officials aren't certain of themselves, but they hope it will be much more restrained than the last rate-hike cycle, which saw the overnight rate lifted for 17-straight meetings under Fed Chairmen Greenspan and Bernanke between June 2004 and June 2006.

That situation of continuous rate hikes is something current Fed officials want to avoid, but if economic growth picks up too much and inflation accelerates, they could find themselves behind the curve and forced to move faster than they now envision.

That would be akin to the February 1994 to February 1995 rate-hike cycle, where the Fed aggressively hiked its benchmark rate from 3% to 6%, surprising markets and leading to intense volatility in financial markets.

Fed Funds Rate

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