Key Points

• A Fed hike would be no surprise to financial markets. This should mean the impact of rate hike itself is limited, given the forward looking nature of financial markets.
• However, what the Fed signals about the future direction of monetary policy could have an impact. We expect the Fed tightening cycle to be very gradual and rates to peak at a much lower level than in previous cycles.
• The widespread expectation of Fed tightening means that U.S. financial conditions have already tightened. This is  most clearly reflected in the strong USD. As a result the economy is already experiencing the impact of tighter monetary policy ahead of the formal announcement.
• Our view is that the U.S. economy is solid enough to accommodate monetary tightening.
• The major risk is that this assessment is not correct, and that tightening represents a policy mistake by the Fed. There are also implementation risks and the risk of disruptions to vulnerable emerging market economies.

For further details please see the attached document.

US Economic Update – Impact of Fed lift-off  (PDF, 304KB)