Could the Fed’s promise of “gradual” tightening mean 0.125% rate hikes?

May 27, 2015 08:55 AM

Regardless of their preferred asset class, the single most important question on traders’ minds is “When will the Federal Reserve start raising interest rates?” 

Investors and analysts (yours truly included) filter each new data point through the lens of the Fed’s interest rate policy and try to determine whether each report means the central bank is marginally more likely to raise interest rates in September, December, or next year. However, as we’ve argued in our special report “Fed Up with Low Interest Rates,” the pace of interest rate increases is far more important than the precise timing of the first rate hike.

When it comes to the speed of tightening, Fed policymakers have been characteristically vague but uncharacteristically unanimous, repeatedly warning that the pace of tightening will be “gradual.” In the last week alone, both FOMC Chair Yellen and Vice Chair Fischer have used near-identical wording in describing the tightening process:

·         Yellen: “If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate…I anticipate that the pace of normalization is likely to be gradual.” (She later said that the Fed would proceed “cautiously” and that it would take “several years” before the federal funds rate returns back to its normal, longer-run level)

·         Fischer: “Which is better, early and gradual or late and steep? If we raise the rate from zero it will be harder to go back to zero if there is a problem. Our processes are not date-determined, they are data-determined… This will be a gradual process." (He too noted that it could take three to four years to bring interest rates back to normal levels and drew a direct contrast between the current tightening plan and the rate hike cycle from 2004 to 2006, when the central bank increased interest rates by 0.25% at 11 consecutive monetary policy meetings)

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About the Author

Senior Technical Analyst for FaradayResearch. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, he creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Weller is a Chartered Market Technician (CMT) and a member of the Market Technicians Association.