Expectations Solidify for Federal Reserve to Lift Rates in December

Divergence of monetary policies in major economies continued to be a dominant theme in markets. The European Central Bank announced at its December meeting new easing measures, while the Federal Reserve is broadly expected to lift interest rates at its December monetary policy meeting.

Developments since the October report

• Expectations sharply increased for the Federal Reserve (Fed) to initiate liftoff in December, while expectations persist for a very gradual pace of interest rate hikes thereafter.
• European Central Bank policymakers announced further easing measures at their December meeting.
• Policy-sensitive assets moved in line with diverging central bank expectations: the two-year U.S. and German sovereign yield spread widened, the U.S. dollar advanced, the euro weakened, and dollar funding costs increased.
• Prices of oil and other commodities approached or reached multi-year lows, weighed down by persistent oversupply and weak Chinese demand.