Fitch: Fed Rate Increase Heralds a Step Up in Normalization

LONDON & NEW YORK--(BUSINESS WIRE)-- The US Federal Reserve's decision to increase interest rates heralds a more rapid normalization of US monetary policy in 2017 and 2018, Fitch Ratings says. A changing macroeconomic and policy backdrop means that the Fed is less likely to delay further increases, although it will still move gradually by historical standards, and its monetary stance remains loose.

The Fed's decision to raise the target range of the Federal Funds rate by 25 bp to 0.5%-0.75% comes one year after it began normalization at the end of 2015. Our latest forecast is for two 25 bp hikes next year but there are risks of a faster pace of increase. US core inflation is now above 2% by some measures, wage inflation has picked up over the last 18 months, and unit labor cost growth has remained steadily above 2%. Unemployment is below most measures of the natural rate and this seems to be garnering greater attention in the Fed's thinking.

Moreover, US growth is less likely to disappoint as it did in 1H16, thanks to a pick-up in private sector investment growth, tighter labor market conditions supporting consumption, and the short-term boost from the incoming Trump administration's planned tax cuts. The President-elect's proposals are unlikely to be enacted in full, but Fitch assumed a fiscal stimulus of 0.5%-0.75% of GDP in our November Global Economic Outlook. This saw us revise our US real GDP growth forecasts to 2.2% in 2017 and 2.3% in 2018, up from our pre-election forecasts of 2.0% and 2.2%.

More expensive funding costs and a stronger dollar could counteract fiscal stimulus to some extent. The prospect of Fed hikes and reflationary US economic policy, combined with rising oil prices, have already pushed longer-term market rates sharply higher (10-year US treasury yields are around 2.5%, from around 1.8% in the run-up to the US election), but the still gradual Fed tightening that we forecast does not pose a risk to economic expansion. Policy rates are still low relative to growth and inflation prospects and sovereign borrowing costs remain low.

Possible triggers for faster Fed normalization might include a bigger fiscal stimulus with a greater focus on public infrastructure than we currently anticipate and further accelerations in wage growth. In addition, the effect of fiscal stimulus on US inflation would be magnified if Trump were to follow through on promises to restrict imports from Mexico and China, but the timing and scope of any such measures are unpredictable and are not incorporated in our US GDP or interest rate forecasts.

The shifting US fiscal backdrop to the Fed decision illustrates how central banks will no longer constitute the only source of macro policy stimulus in 2017. Easier fiscal policy is one reason we expect global growth to pick up in 2017 (to 2.9%, from 2.5% this year).

But the interplay of US economic, fiscal and monetary policy may create global challenges. The prospect of US rate rises has led to periodic bouts of financial market volatility in recent years. With the ECB and BOJ still pursuing ultra-loose monetary policy, Fed normalization is likely to extend the current period of dollar strength. This could be positive for other advanced economies but may increase the cost or reduce the availability of external funding for some emerging markets. A stronger dollar and relative EM currency weakness are reasons why EM sovereign rating pressure looks likely to continue in 2017.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

View source version on businesswire.com: http://www.businesswire.com/news/home/20161214006234/en/

Fitch Ratings Limited
Brian Coulton
Managing Director, Chief Economist
+44 20 3530 1140
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
or
Charles Seville
Senior Director, Sovereigns
+1-212-908-0277
or
Mark Brown
Senior Analyst, Fitch Wire
+44 20 3530 1588
or
Media Relations:
Elizabeth Fogerty, New York
+1-212-908-0526
[email protected]

Source: Fitch Ratings

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Form 8.3 - [ADVANCED MEDICAL SOLUTIONS GROUP PLC - 22 06 2026] - (CGWL)
• Navimow Takes Up to $510 Off Its All-Terrain Robot Mowers for Prime Day, Led by the X4 and i2 AWD
• Form 8.3 - [ANIMALCARE GROUP PLC - 22 06 2026] - (CGWL)