What is a Federal Reserve hike?
That’s a tough question to answer than it may seem.
The Fed aims for a range on the Fed Funds from 0% to 0.25% rather than a specific target like it has had historically. If you ask one person what a ‘hike’ means they might say to a strict target of 0.25% while someone else might say to 0.50% and the final option might be a range of 0.25% to 0.50%.
It turns out the last answer is probably the correct one.
In September, a Fed press release talked about the process for hiking rates and said:
When economic conditions and the economic outlook warrant a less accommodative monetary policy, the Committee will raise its target range for the federal funds rate.
If that didn’t spell it out clearly enough, the Fed’s Williams took it one step further.
And even though since December 2008 the target for the federal funds rate has been a range of between zero and 0.25 percent, rather than a specific figure, most primary dealers who deal directly with the Fed still expect the Federal Open Market Committee to raise it back to a single number when the time comes, according to Reuters polls.
They may be surprised then should the Fed choose not to abandon the range just yet, as some like Williams have suggested.
The Fed’s first rate increase may well be to a range of perhaps 0.25 percent to 0.50 percent instead of a jump to say 0.50 percent, according to Williams, who will be a voter on the FOMC next year when the rate-rise question will be front and center.
Keep in mind the confusions when analysts argue about what’s expected and what’s priced in.
The Federal Reserve
