US Fed may hike interest rate in December

Again the speculation about possible interest rate hike is on the rise ahead of Fed's December meeting. Economists anticipate that the present situation may be right time for US Federal Reserve to hike interest rate from near zero level.

But indications from the US Fed signal that it will be dependent upon the upcoming data.

However, the surging dollar and global weakness are restraining US inflation and exports, but US economy is weathering these adverse conditions, according US Fed. 

Federal Reserve Chair Janet Yellen says there's possibility for a rate hike in December meeting if the upcoming data is supportive.

US Fed said that capital of eight major US banks almost doubled to $500 billion. Regional banks are also well capitalized and community banks loans are picking up.

"If the incoming information supports that expectation, then or statement indicates that December would be a live possibility. The committee expects the economy to grow at a pace that's sufficient to generate further improvement in the labor market and to return inflation to our two percent target", Yellen said.

According to a CNBC report, CME Group's probability on interest rate hike in December is 60 percent after Yellen's statement. Yellen further said that assessment would be informed by all of the data that Fed collects between now and then.

The US economy is weathering foreign weakness and strong dollar reasonably well, according to Stanley Fischer, Vice-Chairman, US Federal Reserve.

Fischer further said that Fed's latest policy statement "indicates that it may be appropriate to raise rates in next meeting scheduled for 15-16 December." 

"Monetary policy has played a key role in achieving these outcomes through deferring liftoff relative to what was expected a little over a year ago. We were running an expansionary monetary policy to offset the effects of the dollar", he adds further.

He also noted that Fed officials lowered projected path for interest rate hike since the dollar started moving up from mid 2014 onwards. The US Fed in September meeting postponed decision on interest rate hike. Since December 2008, interest rate is hovering at near zero level. 

The rising dollar and drop in energy prices are holding down the inflation rate and this may fade away from next year onwards. US inflation is under the Fed's annual target of two percent for over three years.

Once inflation is back to two percent level, this would give more comfort to the US Fed to raise interest rate.

Based on the reports of BBC, it might take some time into next year before inflation starts to gain momentum giving more flexibility to US Fed to increase interest rate. According to an official at US Fed, the rate increases thereafter should be very gradual.

Charles Evans, Chicago Fed President, said, "The outlook for inflation remains too low. A gradual path of normalization would balance both the various risks to my projections for the economy's most likely path and the costs that would be involved in mitigating those risks."

The US dollar has been surging since July 2014 as decline in foreign interest rates when compared to the US rate. The concerns about global economy slowdown and outlook have also pulled down investors' risk tolerance level. 

The rising dollar is impacting US exports as they become expensive for the rest of the world. This impact may continue in 2016 also. However, strong dollar is easing pressure on imports. The effect on US inflation is muted and transient than the influence on economic growth, said Fischer.