Market implications of our revised forecast for Fed policy

We now think that the US FOMC will tighten monetary policy sooner, and by more, than we had previously envisaged. Our revised view is that the federal funds rate will end 2016 at 3.0%, rather than 2.5%. (See our US Economics Update, “Fed to raise rates earlier and further”, sent to clients of our US Economics service yesterday.) Here we set out the implications for our forecasts for US Treasuries, equities and the dollar. Overall, while there is clearly a risk that markets overreact, we still expect the fallout to be limited.