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TD Economics: Slow, But Steady Progress

By PCEO 09/23/2016 12:11:00

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Another December rate increase likely from the Federal Reserve

A modest rebound in investment in concert with solid household spending should lift real GDP to around the 2.0% mark over the next two years, enough to put further downward pressure on unemployment and upward pressure on inflation. This is all the progress the Fed needs to see to be comfortable in continuing to raise its key policy rate.

"Fed speakers in recent weeks have noted that the continued improvement in the economic outlook was likely to justify a move higher in the federal funds rate." says Caranci. "As long as the economic backdrop remains supportive of a 2% pace, we expect them to stick to their guns."

Investors are currently pricing in greater than 50% odds of a 25 basis point rate increase by year-end. Assuming relative market calm prevails, the Fed will likely nudge up interest rates at its December FOMC meeting.

"Still, as it has been thus far (just one rate hike per year), the path forward is likely to be glacial," says Caranci. "We anticipate just one hike in 2017 and one more in 2018, bringing the Fed funds target to just 1.25% by the end of that year."

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