Moody's: Fed rate rise would confirm policy makers set for monetary tightening course - Full report

Moody's Investor Service published a report on the United States under Global Credit Research section:

"A rate hike at the end of the Federal Reserve's March meeting would confirm that policy makers are set on a course of monetary tightening as the US economy nears full employment, says Moody's Investors Service in a report.

The Fed is widely expected to raise interest rates by 25 basis points after its coming meeting, pushing up the federal funds target rate to 0.75% to 1.0%. After this month's meeting, Moody's expects that policy makers will raise rates a further two or three times this year, boosting the fed funds rate target range as high as 1.5% to 1.75%.

Headline inflation rates have started to rise in a number of advanced economies due to firmer energy prices and core inflation is strengthening as well, reflecting a tightening labor market and rising wages.

"If the economy begins to heat up, and wage pressures build up further, the Fed may choose to pursue a steeper rate-hike path to ensure that future inflationary pressures are contained," said Madhavi Bokil, a Vice President and Senior Analyst at Moody's.

For the US government (Aaa stable), one rate hike in isolation will have a negligible effect on borrowing costs. However, a sustained tightening cycle would raise net interest expense in the long term. Nonetheless, a gradual tightening of monetary policy is already incorporated into our base case for the US government.

Moody's expects that net interest expense will climb to 11.1% of total federal spending by the fiscal year 2025 from 6.3% in fiscal 2016. Debt will become less affordable as interest rates rise and the stock of debt climbs faster than government revenues.

The health of the labor market also strengthens the case for the normalization of interest rates.

Moody's raised its forecast for US economic growth in January to reflect the impact of an expected mix of cuts in federal income and corporate tax rates, as well as an increase in public infrastructure spending. Moody's is now forecasting growth of 2.4% in 2017 and 2.5% in 2018, compared with a previous estimate of 2.2% and 2.1%, respectively."