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Industry expert: December rate hike not quite in the bag

Could the markets be responding prematurely?

The markets are already preparing for a rate hike next week, but are they jumping the gun? One expert thinks so.

Within the market predictions, the odds that the Federal Reserve will elect to raise interest rates during the December meeting reached 100%.

The minutes from the November meeting certainly seems to point in that direction.

However, Tom Elliott, deVere Group international investment strategist, says there is still a chance the Federal Open Market Committee elects not to raise rates.

“Financial markets are pricing in as a certainty a 25 basis-point rate hike at the forthcoming FOMC meeting.,” Elliott said. “This will take the key Fed funds rate up to a range of 50 to 75 basis points.”

“Supporting the market’s view is the strength of the U.S. economy, with some strong data emerging last week that suggests inflation pressures are building,” he said.

Some of the economic data Elliott cites includes the 2.9% annual growth in Gross Domestic Product, the CoreLogic Case-Shiller index surpassing its July 2006 high, the jobs report which increased by 178,000 in November, an unemployment drop to 4.6% and an inflation rate of 1.6%.

But, while these signs all point towards an upcoming rate hike, the Fed could still decide not to increase the Federal Funds rate in December.

“However, the markets’ pricing in on a rate rise at this stage could be premature,” Elliot said. “Indeed, we have seen similar market certainty of a rate hike several times before this year, notably in May.”

So what could still cause the Fed to hold off on raising rates? It may all depend on the performance of the dollar in the week to come.

“The prime cause of uncertainty this time is not fear of a rash of weak economic data, but how the dollar behaves over the coming week,” Elliott said. “If it continues to strengthen, in anticipation of higher Fed rates, the Fed may actually hold off.”

“A strong dollar exerts its own form of monetary tightening because exports weaken, import prices fall and so put a downward pressure on domestic competitor prices,” he said. “The Fed may prefer to delay a rate hike, [rather] than impose a double-dose of higher borrowing costs on corporate America as well as a still- stronger dollar.”

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