The consensus amongst portfolio managers, analysts and finance specialists recently surveyed is that the US Federal Reserve will hike its policy rate target range 25bp to 25-50bp from 0-25bp at its meeting on 16th December. This is broadly in line with market pricing, although there’s a residual risk of the Fed delivering a de facto policy rate hike of 12.5bp or 37.5bp.

1. The first hike is the hardest…and so is the second and third
The consensus amongst portfolio managers, analysts and finance specialists recently
surveyed is that the US Federal Reserve will hike its policy rate target range 25bp to 25-
50bp from 0-25bp at its meeting on 16th December. This is broadly in line with market
pricing, although there’s a residual risk of the Fed delivering a de facto policy rate hike of
12.5bp or 37.5bp.
Respondents are less confident about when the Bank of England (BoE) will start to hike
rates and by how much the Fed and BoE will hike over the next 12 months. There is
however an overwhelming view that the rate hiking cycles this time round will be very slow
and gradual, particularly in the UK, with the Fed and BoE expected to hike rates by only
54bps and 30bps, respectively, between now and end-2016 (see Figure 1).
This scenario would be even less hawkish than the current market pricing for Fed hikes of
63bp over the next 12 months although it would still narrow the gap between the Fed and
BoE policy rates to only 13bp (from 37.5bp currently). This seems broadly appropriate
given US and UK economic fundamentals, as I argued in US Slow Sizzle, UK Slow Boil (3
December 2015).
Figure 1: Survey respondents foresee only very timid interest rate hikes in US and UK
Source: www.olivierdesbarres.co.uk
Number of survey respondents: 51
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US Federal Reserve
Bank of England
Expected US Federal Reserve and Bank of England policy rate hikes over next 12 months
Basis points
%ofrespondents

2. Notably, one in five respondents expect the Fed over the next 12 months to either leave
rates on hold after this week’s hike or actually reverse its decision next year by cutting
rates.
If this survey is anything to go by, the expectation (or hope) that a Fed hike tomorrow will
shore up the Fed’s credibility and reduce market uncertainty will be tested in coming
months.
Figure 2: Survey respondents see smaller gap between Fed and BoE hiking cycles than market
Source: www.olivierdesbarres.co.uk
Number of survey respondents: 51
The survey consisted of four sets of questions and was open from 9th
December (08:00) to 12th
December
(20:00). Respondents could chose to skip one or more questions. 51 respondents from finance and
industry filled in the survey. Thank you to all who responded to this survey.
Consensus that Fed will opt for “dovish hike” on 16th December…but still some doubts
Question 1: Do you expect the US Federal Reserve to hike its policy rate 25bp at its meeting on 16th
December?
80% of the 51 respondents surveyed forecast that the Federal Reserve (Fed) will hike its policy rate this
week (see Figure 3) – the first hike since 29th
June 2006 when the Fed hiked rates to a now-almost-
inconceivable 5.25% (see Figure 4). This is broadly in line with the 90% probability of a 25bp rate hike
priced in by the markets.
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Federal Reserve Bank of England
Expected US Federal Reserve and Bank of England policy rate hikes over next 12 months
Basispoints
Survey (weighted average of responses)
Market pricing

3. Figure 3: Four out of five respondents expect the
Fed to hike this week
Figure 4: If Fed hikes on Wednesday, it will have
been 3,457 days since its last hike
Source: www.olivierdesbarres.co.uk
Number of survey respondents: 51
Source: Bank of England, Federal Reserve Bank of New
York
Market participants seemingly expect a dovish tone to the accompanying statement and a downward
revision to FOMC members’ “dot” rate forecasts, to reflect muted inflationary pressures, the weak US
manufacturing sector and tepid global growth – what is being coined a “dovish hike” or “hike-light”.
However, it is still unclear whether the market has fully factored in the other possible (albeit less likely)
outcomes at Wednesday’s meeting, which include the Fed setting a point target of 25bp (a de facto 12.5bp
hike) or a point target of 50bp (a de facto 37.5bp hike).
I do not expect a big surprise this week, specifically forecasting the Fed to hike its policy rate to a new
target range of 25-50bp from the current 0-25bp range. This would be line with the Fed’s September dot
chart in which the median forecast for the target level of the Federal Funds Rate stood at 37.5bp for end-
2015.
The hurdle for the Fed to hike its policy rate going into December was already high; the latest US macro
data, in particular decent November non-farm payrolls and upwardly revised September and October
NFPs, and broadly stable US dollar since early November have all but removed that hurdle. It would likely
take a monumental event in the next 24 hours – way beyond the past fortnight’s significant fall in global oil
prices and equity markets – for Fed Chairperson Yellen to backtrack on her quasi-promise to hike rates by
end-year. Keeping rates on hold would be a serious loss of face and credibility.
Range of mostly dovish views as to how much Fed hike will hike by end-2016
Question 3: By how many basis points do you expect the US Federal Reserve to hike its policy rate
over the next 12 months?
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80
90
yes no
% of respondents expecting US Federal
Reserve to hike its policy rate on 16 December
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Jan 00 Feb 03 Mar 06 Apr 09 May 12 Jun 15
Bank of
England
US Federal
Reserve
Central Bank policy rate, %

4. Figure 5 shows that respondents are less confident about how much the Fed will hike over the next 12
months, although the over-riding impression is that this hiking cycle will be very slow and gradual. A third of
respondents expect the Fed to hike 50bp but half think the Fed will either hike only 25bp or a more
meaningful 75bp. Not a single respondent expects more than 125bp of hikes.
Figure 5: Respondents forecast 50bp of Fed hikes, with risk evenly balanced either side
Source: www.olivierdesbarres.co.uk
Note: Number of survey respondents 51
The weighted average of responses is 54bp, or just slightly more than two full hikes. Assuming the Fed
takes its policy rate to 25-50bp (a de facto 25bp hike) on Wednesday, this would leave only 29bp of hikes
for the full-year 2016, or put differently one full hike and a 16% probability of a second hike. It would be a
stretch to describe this as an actual hiking cycle given that the Fed is scheduled to hold eight policy
meetings in 2016 (see Figure 9). By comparison the market is pricing in about 63bp of hikes (see Figure 2).
Notably, eight respondents expect the Fed over the next 12 months to leave rates on hold after this week’s
hike (“one and done”) and two respondents expect the Fed to actually reverse its decision next year by
cutting its policy rate. The first scenario, for which there is little precedent at the Fed (or other major central
banks for that matter) would not do much for the Fed’s credibility. The second scenario would be a
credibility-crushing and embarrassing u-turn.
BoE expected to delay start of hiking cycle
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Expected US Federal Reserve policy rate hikes over next 12 months
Basis points
%ofrespondents
Weighted average of responses
Market pricing

5. Question 2: When do you expect the Bank of England to start hiking its policy rate?
Survey participants expect a hawkish-light Fed but an even more conservative diet-and-caffeine free Bank
of England (BoE). While Figure 6 shows a reasonably wide range of responses, only 20% of respondents
expect the BoE to hike rates in the next three months, with 60% expecting the BoE to pull the trigger in H2
2016 at the earliest (see Figure 7).
Figure 6: Only 20% of respondents expect a BoE
hike in the next three months…
Figure 7: …with 60% thinking the BoE will only pull
the trigger in H2 2016 or later
Source: www.olivierdesbarres.co.uk
Number of survey respondents: 50
Source: www.olivierdesbarres.co.uk
Number of survey respondents: 50
Uncertainty about timing of BoE hike but tightening cycle expected to be very benign
Question 4: By how many basis points do you expect the Bank of England to hike its policy rate
over the next 12 months?
Unsurprisingly, given the expected late starting date for the BoE rate hiking cycle, respondents expect very
little policy tightening in 2016. Specifically, respondents’ weighted average of rate hikes is only 30bp – i.e.
one full hike and a 20% probability of a second 25bp hike (see Figure 8). This is only marginally more
hawkish than the current market pricing of 24bp of hikes.
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% of respondents expecting first Bank of
England policy rate hike
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Cumulative % of respondents expecting first Bank
of England policy rate hike

6. Figure 8: Survey respondents foresee only one BoE hike and a bit next year
Source: www.olivierdesbarres.co.uk
Number of survey respondents: 50
Figure 9: Many opportunities for Fed and BoE to hike policy rates, very few likely to be taken
Source: Bank of England, US Federal Reserve,Reserve Bank of New Zealand, Reserve Bank of Australia, Bank of Japan
Note: date of meeting in brackets
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Expected Bank of England policy rate hikes over next 12 months
Basis points
%ofrespondents
Weighted average
of responses
Market
pricing
Dec-15 RBA (1) ECB (3) BoE (10) RBNZ (10) Fed (16) BoJ (18)
Jan-16 BoE (14) ECB (21) Fed (27) RBNZ (28) BoJ (28)
Feb-16 RBA (2)
BoE (4) +
inflation report
Mar-16 RBA (1) ECB (10) RBNZ (10) BoJ (15) Fed (16) BoE (17)
Apr-16 RBA (5) BoE (14) Fed (27) RBNZ (28) BoJ (28)
May-16 RBA (3)
BoE (12) +
inflation report
Jun-16 RBA (7) RBNZ (9) Fed (15) BoE (16) BoJ (16)
Jul-16 RBA (5) BoE (14) Fed (27) BoJ (29)
Aug-16 RBA (2)
BoE (4) +
inflation report
RBNZ (11)
Sep-16 RBA (6) BoE (15) Fed (21) BoJ (21) RBNZ (22)
Oct-16 RBA (4) BoE (13)
Nov-16 RBA (1) BoJ (1) Fed (2)
BoE (3) +
inflation report
RBNZ (10)
Dec-16 RBA (6) Fed (14) BoE (15) BoJ (20)