December 4, 2015 / 7:32 PM / 4 years ago

After December liftoff, Wall St. sees Fed taking it slow

(Reuters) - Wall Street’s top banks expect the Federal Reserve to maintain a slow pace of interest-rate increases in 2016 after it first hikes rates later this month, according to a Reuters poll conducted on Friday.

The Federal Reserve headquarters in Washington September 16 2015. REUTERS/Kevin Lamarque

All but one of the primary dealers, brokerages that deal directly with the Federal Reserve, believe the Fed is going to raise rates from its current zero-bound range at the end of its Dec. 16 meeting, the Federal Open Market Committee’s final meeting of the year. For poll results in full, see.

“With the markets well prepped for action on December 16, we believe the hurdle for the Fed not to move in December is extremely high,” said Kevin Cummins, senior U.S. economist at RBS in Stamford, Connecticut.

Following that, the expectation is that the Fed will slowly boost rates. The median forecast for the end of 2016 is for a fed funds rate of 1.125 percent, with most dealers expecting the Fed to maintain a range, rather than a specific target as it did in years past. The median forecast for mid-2016 is about 0.75 percent, dealers said.

The Fed’s rate hike would be the first in nearly a decade, and the first move in policy since it lowered rates to the zero-bound range during the 2008-2009 financial crisis that devastated the U.S. and world economy.

The Fed has moved close to raising rates on a couple of occasions in the last couple of years, only to retreat after adverse reactions from the market or surprisingly weak economic figures that undermined the central bank’s case.

Steady gains in the labor market that have taken the U.S. unemployment rate down to 5 percent have boosted expectations for the Fed move. Still, with the Fed on the cusp of raising rates, the outlook for inflation is low.

The Fed is expected to maintain the fed funds rate through a number of tools, most importantly the interest rate on excess reserves, or IOER, the payment to banks for the $2.5 trillion or so reserves they currently hold at the Fed. That rate is expected to represent the upper end of the fed funds range, which would be 0.5 percent.

The Fed will also use the overnight reverse repurchase program to drain reserves; that RRP rate should represent the floor of the range, so it is expected to rise to 0.25 percent, Wall Street brokerages said.

Since the beginning of the Fed’s efforts to provide extraordinary monetary stimulus, the central bank has ballooned its balance sheet to approximately $4.5 trillion in various types of securities, from about $870 billion in mid-2007.

Dealers’ responses on when the Fed would start reducing its balance sheet were varied. Of those polled, 11 of 18 do not expect the Fed will begin to cut its balance sheet for at least a year after lift-off.

Reporting by David Gaffen, Tariro Mzezawa, Marcus Howard, Dion Rabouin, Sam Forgione, Daniel Bases, Karen Brettell, Lewis Krauskopf in New York, and Kailash Bathija and Aaradhana Ramesh in Bangalore; writing by David Gaffen; Editing by Chizu Nomiyama

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