Fed Increases Key Rate by 0.25% (Business Brief No.3650)

The US Federal Reserve (Fed) resolved to increase its interest rate by 0.25 percent to 0.50-0.75 percent at the meeting on December 13-14, 2016. This not only meets with market expectations, but also signals an uptrend in US interest rates after the Fed held off from doing so for nearly a year, wherein the last increase was made at the Fed's final meeting of 2015.

Given the Fed Chairperson's post-meeting statement, plus the latest US economic forecast and new Dot Plot, KResearch has assessed that it is possible that the Fed will increase the key rate once or twice again in 2017, provided the new US President's economic policies permit that, thus those policies will be the main factor for the Fed to consider before making its rate decision the next year.

Nonetheless, any such changes in Fed monetary policy will likely be gradual since it is conceivable that the Fed will peg the key rate in the coming month, choosing to await the reaction towards the latest increase. Moreover, the Fed will also likely need to contemplate Donald Trump's fiscal measures, too, and whether they will be conducive to 2017 economic growth.

Implications on Thailand: It is expected that any impact of the Fed Funds rate increase on us will be limited since Thailand has a strong external balance, and while our international reserves and current account surplus are high. KResearch thus views that any Fed key rate hike may not directly impact our monetary policy stance over the next 3-6 months. However, the Fed's resolve towards more rate hikes may urge Thailand Monetary Policy Committee (MPC) to curb any key rate cuts for the foreseeable future.