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Evidence From Previous Hiking Cycles

Published 12/08/2015, 04:20 AM
Updated 05/14/2017, 06:45 AM

In line with most other analysts and market participants we expect the Fed to hike 25bp at its meeting next week. In this and upcoming papers and presentations we prepare for the first Fed hike since 2006.

The development in the US labour market this year is key to understanding why the Fed will raise rates.

The IOER and ON RRP will be set at 0.50% and 0.25%, respectively. Due to very large excess reserves, we expect the effective Federal funds rate to settle in the range 31bp-37bp.

The US swap yield curve usually flattens after a hike. The 2Y to 5Y segment suffers the most, while the effect on 10Y is inconclusive. The USD (DXY index) usually strengthens going into the first hike and weakens thereafter. Inconclusive effect on FX volatility.

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