US: Fed into the fog – Rabobank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 10, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Research Team at Rabobank, suggests that despite this optimism, the uncertainty about the state of the global economy and its impact on the US economy are likely to delay the Fed’s next rate hike at least until June.

    Key Quotes

    “If the services sector continues to grow and is not dragged down by the contraction in the manufacturing and mining sectors, we expect the Fed to continue its hiking path. In this light, the recent decline in Markit’s flash services PMI to 49.8 is obviously bad news, but further confirmation from other surveys, such as the non-manufacturing ISM, is needed.

    In her testimony to Congress, Fed Chair Janet Yellen did not appear to be intimidated by the turmoil in financial markets and the economic developments abroad. In fact, the continued reduction in labour market slack is boosting the Fed’s confidence that core inflation will be supported by wages going forward.

    However, for now wage growth remains muted because of the elevated amount of discouraged workers and involuntary part-time workers. What’s more, the global headwinds are likely to delay the return of headline inflation to its 2% target. Therefore, we do not expect the Fed to deliver the four hikes that were implied by the December dot plot. We do not expect more than two hikes in 2016, with risks skewed to the downside. If the recovery falters we may very well see a delay of the next rate hike until next year.

    Things will become more complicated for the Fed if the economy indeed appears to be heading for recession. A single cut of a quarter will bring the target range for the fed funds rate back to the zero bound. This will rekindle the debate about a negative policy rate. It should be noted however, that in seven years of extremely loose monetary policy the FOMC never resorted to negative rates, but instead carried out three rounds of quantitative easing and Operation Twist.

    This shows that the preferences of the FOMC differ substantially from other central banks that were quick to cross the zero bound. Therefore, in case of an imminent recession the Fed is more likely to announce ‘QE4’ and enter negative rate territory only as a last resort.”
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