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JPMorgan says market wrong, Fed is in play for December rate hike

Key Points
  • Fed inflation target of 2 percent proving hard to attain.
  • Market pricing on balance that Fed will not raise rates again this year
  • JPMorgan says wage inflation coming and 3 hikes will happen before 2019
Market not pricing a December Fed rate hike: JPMAM

JPMorgan Asset Management says the wider market is mispricing the likelihood that the U.S. Federal Reserve will raise rates again in December.

According to the CME Group's Fedwatch tool, which bases any rate hike probability on Fed Fund futures contracts, the odds of a 25 basis point hike in December is 47 percent.

Marika Dysenchuk, fixed income client portfolio manager at JPMorgan Asset Management, said Thursday the market is underestimating the likelihood.

"While we will need to see inflation tick up for the Fed to hike, we certainly think they are in play for December.

"They've got a dual mandate and the other side of the equation in terms of employment and labor market is very strong," she said.

At the Federal Open Market Committee's July meeting central bank policymakers voted to hold the current target rate in a range between 1 percent and 1.25 percent.

Minutes released Wednesday from that July decision show some policymakers are pushing for caution on rate hikes due to low inflation, while others believe it's risky to change from the path of normalisation.

Dollar now affected by more than just US politics: JPMAM

And on whether U.S. inflation weakness is just a temporary blip or a longer term issue, Dysenchuk said the solid U.S. growth picture allied to the tight labor market will provide upward pressure on wages.

"We think it is just a matter of time and over the medium and long term we expect to see inflation to kick in.

"So again we expect to see the Fed hike rates in December with probably another couple of hikes next year in order to get to that zero percent real yield and then they might pause and take it from there."