Deliberate doves

Don't panic: Fed's rate hikes will be slowest ever

People exposed to global markets needn't panic about the Federal Reserve. Although the Fed again delayed raising interest rates from zero earlier this month, Chair Janet Yellen on Thursday evening made her firmest case yet for lifting off this year. But even once that happens, the US central bank's interest rate hikes will be at the slowest pace ever.

Some investors worry that the US central bank will want to push rates swiftly to a historically more normal level. After all, in June 2004 when the Fed began post-recession tightening, the federal funds rate increased from one per cent to 5.25 per cent over the course of about two years. A similar path would have the overnight rate somewhere around 4.25 per cent by the end of 2017, assuming the Fed does lift off this year.

Taking Yellen at her word, though, there's almost no chance of that kind of pattern this time around. In her speech on Thursday, she noted that with inflation expected to remain below the Fed's two per cent long-term target for a while, markets should expect rates to increase "at a quite gradual pace over the next few years".

The Federal Open Market Committee's (FOMC) projections back her up. The median of FOMC members' latest forecasts has rates rising by less than 2.5 percentage points by the end of 2017. Furthermore, they see the fed funds rate at just 3.5 per cent for the longer run. That points to an interest-rate trajectory flatter than what's followed any other post-recession lift-off since at least the 1950s.

Meanwhile, traders are only partially persuaded by Yellen's latest hints. Fed fund futures prices on Friday were still implying less than an even chance of a rate hike by the last FOMC meeting of the year, set for December 15-16.

Market participants aren't like the frog of folklore, in danger of being slowly heated up to boiling point - and death - in unnoticed small increments. The way the Fed's dovish menagerie is going, traders can stay in the pot even after the Fed turns on the gentle heat: they'll end up in a comfortable Jacuzzi, not the soup.