US Fed likely to raise rates in Dec amid more upbeat economic outlook: analysts

ASIAN shares rallied to a 10-year high on Thursday, after the US Federal Reserve gave a more sanguine outlook on the economy overnight, and ahead of the announcement of a tax bill from Republicans in the US House of Representatives.

MSCI's broadest index of Asia-Pacific shares outside Japan added 0.2 per cent in morning trade, climbing to its highest levels since November 2007.

Tokyo was up 0.2 per cent at the end of morning trading, while Hong Kong edged up 0.1 per cent.

However, Shanghai shed 0.4 per cent in early trade and Singapore was down 25.67 points, or 0.76 per cent, by midday.

Analysts say it is all but a foregone conclusion that the US Federal Reserve will raise interest rates in December, as the Fed expressed optimism about the US economy.

The Fed, which kept rates unchanged at its latest policy meeting on Wednesday, acknowledged that core inflation remains soft - below its 2 per cent target - but also noted that petrol prices rose in the aftermath of recent hurricanes, which boosted overall inflation in September.

Rabobank analysts added: "In other words, the Fed's view on inflation is unchanged so they are still aiming for a December hike. Considerable attention was paid to the economic impact of the hurricanes, but the Fed concluded that past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term."

In fact, economic activity has been rising at a solid rate despite hurricane-related disruptions, Rabobank said.

Bank of Singapore chief economist Richard Jerram said in a note to clients: "December is likely to see the fifth rate hike of this cycle. A hint came in the statement that followed the Fed meeting overnight, which was more upbeat than before."

Mr Jerram noted that the Fed described economic activity as rising "at a solid rate", compared to "moderately" before.

"The positive assessment reflects recent data releases, such as the initial jobless claims data, which spiked after the hurricanes, but are now back to normal."

Lee Ferridge, the head of multi-asset strategy for North America at State Street Global Markets, said that the market is attaching a probability of over 80 per cent to a December hike.

"Even though the most recent core Personal Consumption Expenditures inflation reading for September, released on Monday, remained significantly below the Fed's 2 percent target at 1.3 per cent, the FOMC (Federal Open Market Committee) continues to focus on the low level of unemployment and its expectation that this will eventually lead to wage inflation," he said in a note to clients.

"It seems it would take a major deterioration in the data - possibly starting with Friday's labour market report - to deter the Fed from tightening in December."

Fidelity International global economist Anna Stupnytska noted in a report that out of the major central banks, the Fed seems to be best placed to continue with a mildly hawkish policy.

But she added that beyond the start of next year, however, a potential weakening in the US economy could prevent the Fed from raising rates in line with their current projections.

"Another important unknown is its balance sheet unwinding. If the cumulative effect of this process does amount to implicit tightening - which is likely - then the rate path should be shallower relative to the Fed's current trajectory," she said.

Investors now have their eye on US President Donald Trump's ambitious tax plans - due to be unveiled by House Republicans on Thursday - although a delay in the rollout has caused analysts to speculate potential trouble ahead.

US lawmakers have made plans for a measure that will seek up to US$6 trillion in tax cuts over 10 years, but is not likely to spell out in detail how they should be offset.