Fed Call: No rate hikes for the foreseeable future – RBS

Research Team at RBS, notes that the US July employment report suggested that momentum in the labor market remains strong, leaving the door open for possible Fed action later this year.

Key Quotes

“In an interview from August 4 (which appeared in the Financial Times on August 7), Fed Governor Powell said he would “need to see two really good employment reports. And then it is a conversation. I wouldn’t be pounding the table saying we really need to raise rates.” To us, that hardly sounds like a Fed on the verge of tightening.

In fact, the bigger takeaway from Powell’s interview was his focus on downside risks: “With inflation below target, I think we can be patient…The issue is that if you look around the world there are just a lot of risks that could affect us. So it is a US economy that is probably pretty close to its pattern of the last seven years, but the risks to us from the global economy are to the downside.”

Governor Powell also said that he sees it hard to raise rates “in a world where everyone else is cutting and demand is weak around the world.” He even offered some sympathy to the secular stagnation view, adding to the growing number of FOMC members who have cited this as a reason to be cautious about the timing and path of rate hikes. Mr. Powell pointed out that “The probability of an era of weaker growth, lower potential growth, for a longer period of time — that worries me more than it used to.”

Fed officials will likely be reminded of weak productivity growth on Tuesday when the Q2 report is due to be released; we forecast a rise in productivity of just 0.3%q/q, ar (consensus: +0.5%) after a 0.6%q/q, ar rate of decline in Q1. In any case, in our view, the hurdle for a rate hike as early as September remains high. We continue to expect the Fed to remain on hold throughout 2016.”