What could seal the deal for a December hike? - ING

"While there may be some added caution on the dots, the encouraging economic outlook means the core message from the Fed is still that the market remains too complacent on rate hikes," explains James Knightley, Chief International Economist at ING.

Key quotes:

"The economy grew 3% in the second quarter, and there will probably only be a marginal slowdown in the third (despite some soft retail sales numbers) given the prospect of a significant inventory rebuild. We don't see any long-term economic disruption from Hurricanes Harvey and Irma. In fact, in the medium term, they are likely to boost growth due to rebuilding efforts and households and businesses replacing lost equipment and belongings."

"We also note inflation could rebound more quickly than the market anticipates. Headline CPI is back to 1.9% and with gasoline prices having spiked, dollar weakness is pushing up import costs, and there are tentative signs that wages are again on the rise given the tight labour market."

"We therefore suspect the Fed will keep its positive, longer-term forecasts unchanged and we currently look for a December rate rise followed by two more 25bp hikes next year."

Politics, not data, the main risk to a December hike

"The recent hurricanes saw President Trump push and get a three-month extension of the debt ceiling. While this is positive as this allowed relief funding to be released for affected areas but it now means the 13th December FOMC meeting will coincide with a new debt ceiling deadline."

"Given the divisive nature of politics in Washington right now, we are somewhat nervous that there could be major market worries about a government shutdown, the furloughing of workers and the potential talk of debt default, although this would be highly unlikely to happen"

"The result is that the Fed could conceivably choose to wait until early next year given the potential for a pickup in market volatility - although that is not our base case."

Don't rule out impact on yields once normalisation begins

"In a bid to avoid taper tantrum 2.0, the Fed has for many months made it clear that it wishes to 'normalise' (or shrink) it's USD 4.5 trillion balance sheet. We already know this will be done by a very slow tapering of the reinvestment of maturing assets - you can find out more in five charts explain how the Fed plans to shrink its balance sheet."

"Now we know most of the details, the formal announcement of an October start to the balance sheet unwind should be taken in the market's stride. But given the process will leave a sizeable extra chunk of bonds for the private sector to absorb, our Debt Strategy team estimate that this could in itself add 5-10bp on the 10-year yield."