Daily Insight
Group Economics Macro & Financial Markets Research Maritza Cabazas,& Georgette Boele
Dovish Fed: risk of further delay
+31 20 343 5618
18 September 2015 • • •
FOMC strikes a dovish tone but continues to signal rate hike this year Our view is that a rate hike in December remains likely… …but concerns about the global economy suggest that risks of a delay to 2016 are now larger
Financial turmoil puts FOMC on hold
Fed. One of the members wanted negative interest rates,
After two days of meetings, the Fed kept rates on hold. The
suggesting that the economy needed further stimulus.
FOMC statement showed that policymakers are concerned about recent global developments and the tightening of
Market reactions
financial conditions and their impact on economic activity.
Markets were volatile following the decision, but overall
However, the door was left open for a rate hike this year.
outcomes were supportive for bonds and gold, but negative for
During the press conference, Chair Yellen mentioned that
the dollar, as markets scaled back rate hike expectations. Gold
every remaining meeting this year remains a possibility for a
prices moved higher, while the US dollar and 10y US Treasury
move. However, FOMC members would like to see the extent
yields fell. At the end of the session US equities gave up their
to which these developments have impacted the US economy
gains and closed down for the day. If the Fed eventually hikes
given the strong financial interconnectedness. FOMC
in December as we expect, then the US dollar and yields
members also want to see further improvement in the labour
should move up, while gold prices are likely to fall back. The
market, particularly a recovery in part-time involuntary
EUR/USD should also be pushed down by a stepping up of
employment and labour force participation. This suggests that
ECB QE.
October is too early and that risks of a delay of a rate hike to 2016 have increased. We expect a rate hike in December as
FOMC individual rate projections
global risks should ease and the US economy should continue
rate %
midpoint of target range level for the federal funds rate
4.5
to recover.
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4
FOMC forecasts: no urgency for rate hike
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The Summary of Economic Forecasts, painted a mixed picture.
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3.5
In the short run, slightly weaker growth but lower
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unemployment, while inflation was lowered. At the same time,
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3
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the long-term outlook was not fundamentally altered. In 2015,
••• 2.5
GDP growth edges up to 2.1% from the 1.9% projected in June, while for 2016, the Fed lowered its GDP forecast to 2.3%
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••
••
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2
from the 2.5% projected in June. Long run growth was
•••
unchanged. Meanwhile, the unemployment rate forecasts are
1.5
••
now closer to the long run projection of 5%. As for inflation, the
••••
forecasts showed “reasonable confidence” that inflation would
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1
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move back to the 2% target.
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••••• 0.5
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Dot plot shows interest rate hike this year
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The “dot plot” which shows participants views on the appropriate pace of interest rate normalisation shows that FOMC participants expect the lift off this year. However, four
25bp to 3.5%, reflecting the slightly more cautious tone of the
• 2016
Red dots indicate median Source: Federal Reserve
members feel that the Fed should not hike until 2016 or later. The long run projection of the federal funds rate was lowered
• 2015
.
2017
Longer run