Market expectations for a December rate hike likely correct, Fed's Rosengren says

Financial markets' projections for the likelihood of an interest rate hike in December were likely correct, barring any unexpected developments, a top US central bank official said.

In a summary of a speech prepared for delivery at the Portland, Maine Regional Chamber of Commerce the president of the Federal Reserve bank of Boston, Eric Rosengren, said: "absent significant negative economic news over the next month [market pricing for the odds of a December rate move] seems plausible”.

"I would much prefer that tightening be gradual, and that policymakers try to avoid circumstances in which we need to tighten more quickly,” Rosengren said, adding that “my concern is that more rapid tightening, were it necessary, could risk disrupting the recovery”.

The central banker specifically referenced the risk that the monetary authority might need to tighten policy more quickly should it 'overshoot' what is likely to be a sustainable unemployment rate in the long-run.

For him, progress-to-date on bringing headline and core inflation (measured through the price deflator for personal consumption expenditures) and expectations for that to continue likely explained why markets had priced-in big odds of a 25 basis point December 2016 rate hike.

Rosengren also explained why he did not dissent from the majority decision at the Federal Reserve to stay put on rates at its early November meeting as he did in September.

The policy statement issued after the November meeting as aligned with the notion and the market perception of an elevated chance of a December hike, he said.

As of 1413 GMT Fed funds futures were discounting a 90.6% probability of a December rate hike, up from 85.8 in the previous session, according to the Chicago Mercantile Exchange's Fed Watch tool.

The odds of a further 25 basis point rate hike by the time of the 1 November 2017 Fed policy meeting were seen at 65.6%.