Thursday, December 31, 2009

Predicting the pace of rate hikes

From the Financial Post's Trading Desk blog:

It's pretty much a sure thing that the U.S. Federal Reserve will begin tightening monetary policy next year but when and by how much the central bank will raise interest rates remains a bit of a mystery.

Joseph Lavorgna, U.S. chief economist, Deutsche Bank, weighed in on the subject this week, saying small rate increases will begin in the second half of 2010, followed by larger hikes in 2011.

"We are projecting 100 bps of tightening next year and then 200 bps of tightening in 2011, thereby bringing the funds rate to around 3%.

In particular, he expects the first two rate increases to be 25 basis points in size, occurring at the August and September FOMC meetings.

After that, he forecasts the Fed to hike 50 basis points in November and then at alternate FOMC meetings thereafter.