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Next Fed rate rise tipped for March

The Federal Reserve is expected to follow this week’s historic first post-crisis rate rise by lifting US borrowing costs again in March, according to a Financial Times survey of leading economists.

More than two-thirds of the 42 top economists polled by the FT expect another 25 basis point increase in the central bank’s benchmark rate in three months, taking the Fed at its word even as most investors bet that the pace of future increases will be more gradual.

This contrast with market expectations means Fed chair Janet Yellen faces fresh challenges next year, even though investors credited her with pulling off the rate move smoothly, without the market tantrums many had feared.

Traders and investors now expect the Federal funds rate to remain below 1pc into 2017. That implies a far shallower pace of increases than the median of the ‘dots’ — the individual projections of Fed policymakers — which point to the Fed funds rate reaching 1.375pc by the end of 2016.

The economists aligned more closely with the Fed, with slightly more than half of them expecting the central bank to follow with its third rise by June, to take the funds rate to 0.75-1pc.

The Fed meeting landed in a volatile week for global equity and credit markets, with US mutual funds and exchange traded funds invested in high-grade corporate debt hit by a record wave of redemptions.

Yields on both Merrill Lynch US investment grade and junk bond indices hit their highest level since 2012 this week, energy prices fell and the trade-weighted dollar logged its greatest weekly gain since the start of November, complicating the picture for Ms Yellen.

Economists have cautioned that lacklustre global economic conditions could stay the Fed’s hand as the dollar depresses exports and sliding oil prices weigh on inflation, a point policymakers have emphasised they will watch.

“It’s critical: everything flows into financial conditions. The trade-weighted dollar impacts conditions. Credit spreads play into financial conditions. Equities play into financial conditions,” Ellen Zentner, Morgan Stanley’s chief US economist, said. “The extent that the dollar rises further, depressing inflation in the coming months, will play into how they feel about raising rates.”

Risk markets, which rallied as the Fed confirmed it would tighten policy at a ‘gradual’ pace, have since retreated, with the S&P 500 slipping back into negative territory for the year.

‘More dollar rises will play into how [the Fed] feel about raising rates’.

Published in Dawn, Business & Finance weekly, December 21st, 2015