30 Apr 2015
Dollar strength behind Fed’s uneasiness for a hike? – Rabobank
FXStreet (Barcelona) - The Fed might hike in the last quarter of this year, expects Philip Marey, Senior US Strategist, as he comments on the impact of USD strength on inflation and investment, and further argues that the downturn in GDP growth isn’t only a result of disruptive weather.
Key Quotes
“The Fed’s downgraded economic assessment came after the release of Q1 GDP growth, which turned out even lower than expected: 0.2% quarter-on-quarter at an annualized rate is close to an economic standstill. The slowdown in personal consumption to 1.9% and residential investment to 1.3% was accompanied by an outright 3.4% contraction in business investment and a negative contribution of net exports to GDP growth of 1.25%. This suggests that we cannot attribute the entire GDP growth slowdown to the weather.”
“The appreciation of the US dollar in recent months is undermining the international competitiveness of US exporters and reducing their incentives to invest. In addition, the decline in oil prices has reduced the incentives for investment in the energy sector more specifically. These factors will continue to play a role after the winter, so it may take some time before we see the US economy in full swing again.”
“The impact of the dollar appreciation is not only holding back economic growth, but also core inflation. Ironically, the strength of the dollar is for a large part caused by expectations of the Fed’s monetary tightening.”
“What’s more, an actual rate hike could lead to further appreciation, giving US exporters hardly any time to adjust to their loss in competitiveness and keeping down core inflation. A premature rate hike would slow down the return of inflation and unemployment to their targets.”
“Therefore, we continue to expect the Fed to delay the first hike to the final quarter of the year.”
Key Quotes
“The Fed’s downgraded economic assessment came after the release of Q1 GDP growth, which turned out even lower than expected: 0.2% quarter-on-quarter at an annualized rate is close to an economic standstill. The slowdown in personal consumption to 1.9% and residential investment to 1.3% was accompanied by an outright 3.4% contraction in business investment and a negative contribution of net exports to GDP growth of 1.25%. This suggests that we cannot attribute the entire GDP growth slowdown to the weather.”
“The appreciation of the US dollar in recent months is undermining the international competitiveness of US exporters and reducing their incentives to invest. In addition, the decline in oil prices has reduced the incentives for investment in the energy sector more specifically. These factors will continue to play a role after the winter, so it may take some time before we see the US economy in full swing again.”
“The impact of the dollar appreciation is not only holding back economic growth, but also core inflation. Ironically, the strength of the dollar is for a large part caused by expectations of the Fed’s monetary tightening.”
“What’s more, an actual rate hike could lead to further appreciation, giving US exporters hardly any time to adjust to their loss in competitiveness and keeping down core inflation. A premature rate hike would slow down the return of inflation and unemployment to their targets.”
“Therefore, we continue to expect the Fed to delay the first hike to the final quarter of the year.”