Deutsche Bank Defends Fed, Says Rate Hike Is Not A Mistake

• According to a research report by analysts at Deutsche Bank, there is now a ‘broad-based consensus' that the Fed will ‘take the plunge' and raise rates in December.
• The analysts noted that the US economy is ‘strong enough' to withstand higher rates.
• The analysts added the Fed will ‘gradually' raise rates throughout 2016.

Will the Fed hike its rates in December? Most market participants have concluded that It is merely a matter of when - and not if, the Fed will raise the federal funds rate. According to a new research report by analysts at Deutsche Bank, the first rate hike since 2006 will be finalized during the Fed's upcoming December 16 meeting. The report argued that the US economy is "strong enough" to withstand higher rates, despite "lingering concerns" that the shift in policy is a "mistake." The report noted that the "shocks" which prevented the Fed from acting in June and September have "largely dissipated." As an example, ahead of the September Fed meeting, market participants observed "some slowdown" in labour market and "little evidence" of wage inflation. The current conditions indicate a "strong rebound" in the labour market and a "pick-up" in wage inflation. Following the initial December rate hike, the Fed is expected to "gradually" raise rates even further throughout 2016 as it "assesses the economy's reaction" to the policy tightening. The report added that the Fed may initiate more hikes in the first half of 2016 versus the bottom half. "From a markets perspective, the repricing of the Fed's rate path could lead to a tightening of financial conditions – this is especially true if the Fed decides to taper its reinvestment policy," the report argued. "These factors combined could lead the Fed to pause briefly in the second half of [2016]." Finally, the report argued that given the "widespread agreement" of an imminent Fed rate hike, a "strong" initial market reaction is "unlikely." Moving past the first rate hike, the outlook for risk assets will be "determined by how the disagreement between the market and the Fed about the pace and extend of hikes get resolved."