Macro Weekly
Group Economics
16 September 2016
Time for a hike? Nick Kounis
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Head Macro & Financial Markets Research Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
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A Fed interest rate hike does not look likely next week We expect a hike in December, though the case for higher interest rates in general is far from convincing Meanwhile, the BoJ is likely to announce a monetary easing package The combination of a Fed on hold and BoJ stimulus could start to reverse bond market worries of an exit from easy monetary policy
FOMC meeting in focus this week The FOMC meeting next week will be of even more interest than usual. Commentary from Fed officials in the run up to the meeting has turned more hawkish suggesting that the central bank is edging closer to a rate hike. However, we think a rate hike next week is unlikely. Our base scenario is for a December move, but even then, the case does not seem overly convincing. More hawkish Fed commentary Many Fed officials have suggested that the time for higher interest rates is approaching. Fed Chair Yellen remarked at Jackson Hole that ‘the case for an increase in the federal funds rate has strengthened in recent months’. This seems to be where many Committee members are. They judge a rate hike is getting closer, but have been non-committal on the timing. Indeed, it could be argued that if they were really convinced of a September rate hike, they would have tried to prepare markets more than they have done. At time of writing, markets assign less than a 20% chance to a September rate increase, and that probability has always been comfortably below 50% in recent weeks. Data uncertainty Meanwhile, recent data may have created some doubts about the direction of the US economy, strengthening the case for the FOMC to wait. For instance, retail sales have been soft suggesting that consumer spending is slowing in Q3. The ISM reports deteriorated sharply in August, and are now at levels historically consistent with just 1% GDP growth. We do not think the US economy is set for a slowdown, a moderate growth trend looks likely. However, recent numbers do raise questions. The exception to this narrative is the labour market. Although nonfarm payrolls slowed in August, the underlying trend remains solid. On the other hand, there is not much sign of inflationary pressure coming from the labour market, and Fed’s preferred measure of inflation remains below target.
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