3 Jul 2015
Fed might delay the first rate hike to Q4 2015 – Rabobank
FXStreet (Barcelona) - Philip Marey, Senior US Strategist at Rabobank, offers the outlook for US rates, expressing doubts on a September rate hike and maintaining a Q4 2015 call for the rate normalization to begin.
Key Quotes
“The Fed’s preferred measure of inflation, the PCE deflator remained at 0.2% year-on-year in May, undershooting the Fed’s target for the 37th month in a row. The core PCE deflator fell to 1.2% from 1.3%. There is a growing concern among doves that the inflation undershoot since 2012 may give the impression that the Fed’s inflation target is asymmetric in the sense that undershooting is taken less seriously than overshooting….. the probability distribution of inflation has a mean that is close to 2%. However, to the doves in the FOMC the prolonged undershoot of the inflation target is an additional argument to take it slow.”
“Although the Fed is focused on the domestic economy, the problems with Greece could become relevant in several ways. A deterioration in the international economic outlook would reduce demand for US goods and services. Euro weakness would make it especially more difficult for US firms exporting to the Euro zone, adding to the burden of the strong dollar appreciation in the second half of last year. Although safe haven flows would reduce US treasury yields, various risk premia could rise and a Grexit would increase stress in the international financial system.”
“Given the continuing headwinds and downside risks to the US economy, we have our doubts about a September rate hike and we see no reason to change our long-held forecast that the Fed will delay its first rate hike to Q4, more specifically December.”
Key Quotes
“The Fed’s preferred measure of inflation, the PCE deflator remained at 0.2% year-on-year in May, undershooting the Fed’s target for the 37th month in a row. The core PCE deflator fell to 1.2% from 1.3%. There is a growing concern among doves that the inflation undershoot since 2012 may give the impression that the Fed’s inflation target is asymmetric in the sense that undershooting is taken less seriously than overshooting….. the probability distribution of inflation has a mean that is close to 2%. However, to the doves in the FOMC the prolonged undershoot of the inflation target is an additional argument to take it slow.”
“Although the Fed is focused on the domestic economy, the problems with Greece could become relevant in several ways. A deterioration in the international economic outlook would reduce demand for US goods and services. Euro weakness would make it especially more difficult for US firms exporting to the Euro zone, adding to the burden of the strong dollar appreciation in the second half of last year. Although safe haven flows would reduce US treasury yields, various risk premia could rise and a Grexit would increase stress in the international financial system.”
“Given the continuing headwinds and downside risks to the US economy, we have our doubts about a September rate hike and we see no reason to change our long-held forecast that the Fed will delay its first rate hike to Q4, more specifically December.”