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Fed holds course for rate hike in December and two more in 2018, says Landesbank

The Federal Reserve left the target range for overnight rate at 1.00 percent to 1.25 percent, in line with the unanimous expectation of the bank economists surveyed by Bloomberg, the Open Market Committee of the Federal Reserve (Fed) resolved at its meeting on October 31- November 1 to leave the target range for the overnight rate at 1.00 percent to 1.25 percent

With regard to inflation, the monetary authority is confirming its previous assessment, according to which the weaker phase recorded this year is not considered to be sustainable. The Fed, therefore, expects the inflation rate to stabilize at around its target of 2 percent in the medium term. The risks to the economy are broadly balanced, although inflation developments need to be monitored closely, Landesbank reported.

In addition, growth in employment is continuing at a solid pace. Under these conditions, the Fed will in all probability not let the still only moderate price increases sway it from its course of gradual normalization for the time being, and is therefore likely to implement the third interest rate increase this year at its next meeting on December 13. From the current perspective, this decision will not then present any potential for greater surprises for market participants, as the market-implied likelihood of a rate rise in December is at roughly 90 percent.

Furthermore, now that President Trump has announced his nomination of Jerome Powell to take over from Janet Yellen, who will leave her position as Fed Chair at the beginning of February, a high degree of continuity in US monetary policy is also ensured for the coming year.

"We expect the Fed to continue with its current cautious normalization plans almost one-to-one under Powell and anticipate two rate hikes in 2018, meaning that the target range for the overnight rate is forecast to reach 2 percent (upper end of range) at the end of next year," Landesbank commented in its latest research report.

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