NAB changes tone on Fed rate hike

In its latest US economic update, the major bank said it has changed its view about the likely path of the US Federal Reserve funds rate “in light of recent developments in financial and commodity markets”.

“Our revised projection calls for a slower pace of increases earlier on and also lowers the expected peak rate [to 3 per cent],” NAB said.

The big four bank ruled out the possibility of the US Fed using negative interest rates as a policy tool as “chatter”.

“Our view is that the most likely trajectory for the Fed funds rate is upwards,” NAB said.

NAB said the US unemployment rate – at 4.9 per cent – is already at the long-term level expected by the Fed, while there are signs that wage growth is strengthening and inflation is low.

“Future tightening by the Fed will likely be quite cautious and sensitive to developments ... as a result, we have less than one rate hike a quarter up to mid-2017,” it said.

“However, if, as we expect, unemployment keeps falling and inflation moves back up around the 2 per cent mark, then the Fed will want to accelerate the process, but even then still only slowly by historical standards.”

[Related: Three Fed rate hikes tipped for 2016]