Group Economics
Macro Weekly Will the Fed hike?
Nick Kounis +31 20 343 5616
11 September 2015 The FOMC meets next week to decide on interest rates. Analysts are split on whether the Federal Reserve will raise interest rates for the first time in nine years. The Committee itself also seems split. This reflects conflicting signals. Domestic economic strength signals that the Fed should act. However, a range of external forces – from emerging market risks, commodity prices and the dollar - suggests that it should keep interest rates on hold. On balance, we think the Fed will decide to wait. We expect an interest rate increase in December. The most interesting FOMC meeting in years
Market expectations for the fed funds rate
As far as the outcome on interest rates is concerned, FOMC
Implied rate from 30-day fed funds futures, %
meetings for a number of years have been non-events. There was virtually no chance of any kind of move. The focus has been exclusively on Fed commentary to try and get hints about
1.00 0.82 0.80 0.65
future policy. Next week’s meeting is different. There is a real chance of the first interest rate hike in nine years.
0.60
0.52 0.39
0.40
Analysts are split but edge towards a hike According to the Bloomberg poll at the time of writing, economists are almost split down the middle on whether the Fed will move or not. Of the 81 economists in the survey, 39
0.20
0.32 0.20
0.00 Q3 15
Q4 15
Q1 16
Q2 16
Q3 16
Q4 16
expect the Fed to leave its target range for the fed funds rate at 0-0.25%. Meanwhile, 42 expect a 25bp increase, which
Source: Bloomberg
would take the range to 0.25-0.5%. That means that on balance the median is for an increase, though it is a close call. Markets tilted towards no change Financial markets on the other hand, appear convinced that there will be no change. The fed funds rate usually sits in the
Arguments on both sides The split in opinions reflects that strong arguments for and against raising interest rates, as well as the fact that the Fed has to balance progress towards a dual mandate, with the
middle of the target range. It is now at 14bp so if the Fed were
central bank aiming for both full employment and an inflation
to hike the fed funds rate, it should rise to just under 40bp. The
goal of 2%.
implied federal funds rate from the October 2015 future sits at around 20bp. So markets are pricing in only a small chance of
Robust economic growth
an increase in the target range. Separate calculations from
The case for a rate hike rests on the strength of the domestic
Bloomberg imply that markets attach a 28% chance of a move
economy. Economic growth has been quite volatile on a
next week. Though that rises to 60% at the December FOMC
quarterly basis, but in the year to the second quarter, the
meeting.
economy grew by 2.7%. This almost certainly above the economy’s trend rate.
FOMC members are also split There is an old joke that if you put two economists in room you will get three different opinions. The split among market economists is also mirrored by vastly differing views among the members of the FOMC. At Jackson Hole, more hawkish
Labour market strength This view is supported by labour market developments. Over the last year, employment has grown by around 240K each
members – such as James Bullard – argued that the Fed was
month, a very healthy level historically. Over that time, the
still on course to raise interest rates in September, despite the
unemployment rate has fallen by around one percentage point
market unrest. More dovish members – such as Bill Dudley –
to 5.1%. It is at a relatively low level historically.
said that the case was now less convincing. The Vice Chair Stan Fisher sat on the fence saying it was ‘premature’ to make that call.
2
Macro Weekly - Will the Fed hike? – 11 September 2015
Very easy policy The hawks will argue that strength of the domestic economy seems at odds with the Fed maintaining interest rates at around zero and real interest rates in negative territory. Those are measures for crisis times and the economy is returning to normal. It could also be argued that the Fed’s procrastination in raising interest rates is actually adding to the uncertainty. Downside risks from China… The case against the rate hike rests on a number of significant external risks. As we have underlined on these pages in recent weeks and months, there are significant risks surrounding the outlook for emerging markets. There is a risk that the
Unemployment low but so is inflation %
% yoy
11 10 9 8 7 6 5 4 3 2
3.0 2.5 2.0 1.5 1.0 0.5 00
02
04
06
08
Unemployment rate (lhs)
10
12
14
Core PCE inflation (rhs)
Source: Thomson Reuters Datastream
slowdown in China’s economy is sharper than expected. We expect no change …and other emerging markets
On balance, given these various arguments, we think the
This would pull down other emerging markets, which are
FOMC will opt to hold the target range where it is. We think
already facing a range of challenges from (geo) political
Chair Janet Yellen will want to have a strong consensus in the
instability, to lower commodity prices. In addition, emerging
Committee in favour before moving. In addition, waiting a little
markets are facing tighter financial conditions, partly because
longer until there is more information about the outlook for
expectations of fed rate hikes have encouraged capital
emerging markets and financial markets calm seems like
outflows and FX reserve liquidation, which leads to lower
almost a ‘free’ option. Finally, the ECB – and possibly – the
money supply growth.
BoJ – could soon step up monetary stimulus, and an early rate hike could trigger a surge in the US dollar. Our base case is
Market instability
that the Fed will raise interest rates at the December FOMC.
These risks have fuelled unrest in financial markets globally over recent weeks. Although these are some signs of
Fed likely to signal a slow path of rate hikes
stabilisation, volatility remains high and sentiment remains
Apart from the actual rate decision, the Fed’s communication
fragile. So the doves would argue that it is better not to rock
on the future path of interest rates is crucial. The FOMC will
the boat.
publish new forecasts for the economic outlook and member views of the appropriate fed funds rate going forward (the so-
Subdued inflation means there is no hurry
called dot plot). In addition, Chair Yellen will conduct a press
In addition, there is no need to hurry given that inflation is
conference. Our sense is that the Fed will continue to signal
currently subdued and there are no signs of rising wage
that it will raise interest rates this year and then at a very slow
pressures. Indeed, low commodity prices have pushed down
pace thereafter.
market inflation expectations (for instance as measured by the 5y5y inflation swap).
Four hikes next year After a December move, we expect to see four interest rate
The balance of risks
hikes next year, which means a move every other FOMC
Some members of the FOMC will argue that the cost of waiting
meeting. The target range would end up at 1.25-1.5%, with fed
is lower than the cost of raising rates too soon and having to
funds rate at around 1.4%. Current market expectations (from
reverse course. The low level of interest rates and limits to
fed funds futures), imply an even slower pace, with the fed
unconventional policy suggest that the Fed would lack
funds rate seen ending next year at around 0.8%
ammunition in case of a new downturn.
3
Macro Weekly - Will the Fed hike? – 11 September 2015
Main economic/financial forecasts GDP grow th (%)
2013
2014
2015e
2016e
1.5
2.4
2.7
3.1
United States
-0.2
0.9
1.5
2.2
Eurozone
Japan
1.6
-0.1
1.0
1.2
United Kingdom
1.7
3.0
2.8
2.6
China
United States Eurozone
3M interbank rate
03/09/2015 10/09/2015
+3M
+12M
2015e
0.33
0.34
0.6
1.3
0.6
2016e 1.6
-0.03
-0.04
0.00
0.00
0.00
0.00
Japan
0.17
0.17
0.2
0.2
0.2
0.2
United Kingdom
0.59
0.59
0.7
1.5
0.7
1.7
03/09/2015 10/09/2015
2016e
7.7
7.3
7.0
7.0
World Inflation (%)
3.1 2013
3.3 2014
3.1 2015e
3.8 2016e
+3M
+12M
2015e
United States
1.5
1.6
0.4
2.4
US Treasury
2.16
2.23
2.3
2.7
2.3
2.7
Eurozone
1.3
0.4
0.2
1.5
German Bund
0.73
0.70
0.5
1.3
0.5
1.4
Japan
0.3
2.8
0.7
1.4
Euro sw ap rate
1.04
1.02
0.8
1.6
0.8
1.6
United Kingdom
2.6
1.5
1.1
1.9
Japanese gov. bonds
0.38
0.33
0.7
1.0
0.7
1.0
China
2.6
2.0
1.5
2.0
UK gilts
1.90
1.86
2.0
2.6
2.0
2.7
World Key policy rate
4.3 10/09/2015
3.9 +3M
3.8 2015e
3.8 2016e
03/09/2015 10/09/2015
+3M
+12M
2015e
2016e
Federal Reserve
0.25
0.50
0.50
1.50
EUR/USD
1.11
1.12
1.00
1.05
1.00
1.10
European Central Bank
0.05
0.05
0.05
0.05
USD/JPY
120.1
120.6
128
135
128
135
Bank of Japan
0.10
0.10
0.10
0.10
GBP/USD
1.52
1.54
1.49
1.50
1.49
1.49
Bank of England
0.50
0.50
0.50
1.50
EUR/GBP
0.73
0.73
0.67
0.70
0.67
0.74
People's Bank of China
4.60
4.35
4.35
4.35
USD/CNY
6.36
6.38
6.55
6.70
6.55
6.75
10Y interest rate
Currencies
Source: Thomson Reuters Datastream, ABN AMRO Group Economics.
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Macro Weekly - Will the Fed hike? – 11 September 2015
Key Macro Events Day
Date
Time
Country
Sunday Sunday Sunday
13/09/2015 13/09/2015 13/09/2015
07:30:00 07:30:00 07:30:00
CN CN CN
Monday Monday Monday Monday Monday
14/09/2015 14/09/2015 14/09/2015 14/09/2015 14/09/2015
06:30:00 09:00:00 11:00:00 14:00:00 15:45:00
Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday
15/09/2015 15/09/2015 15/09/2015 15/09/2015 15/09/2015 15/09/2015 15/09/2015 15/09/2015
Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday
Key Economic Indicators and Events
Period
Latest outcome
Consensus
Retail sales - % yoy Industrial production - % yoy Fixed asset investment - % yoy
Aug Aug Aug
10.5 6.0 11.2
10.6 6.5 11.2
JP CH EC IN EC
Industrial production - % mom Foreign currency reserves - CHF mln Industrial production - % mom CPI - % yoy ECB announces weekly QE details
Jul F Aug Jul Aug
-0.6 531820 -0.4 3.8
#N/A N/A 0.3 3.6
0.4
10:30:00 11:00:00 14:30:00 14:30:00 15:15:00 16:00:00
NL GB DE US US US US JP
Government presents Budget 2016 CPI - % yoy Aug ZEW index (expectation economic growth) Sep Retail sales - % mom Aug Empire State PMI - Manuf. general business conditions - index Sep Industrial production - % mom Aug Business inventories - % mom Jul Annual rise in monetary base Sep 15
0.1 25.0 0.6 -14.9 0.6 0.8 80.0
0.0 17.7 0.3 -0.5 -0.2 0.2 80.6
0.0 10.0 0.4
16/09/2015 16/09/2015 16/09/2015 16/09/2015 16/09/2015 16/09/2015 16/09/2015 16/09/2015
10:30:00 10:30:00 11:00:00 14:30:00 14:30:00 14:30:00 14:30:00 16:00:00
GB GB EC US US US US US
Claimant count unemployment rate - % Change in claimant count - thousands Core inflation - % yoy Inflation excl food and energy - % mom Inflation excl food and energy - % yoy Inflation (CPI) - % mom Inflation (CPI) - % yoy NAHB home builders' confidence index
Aug Aug Aug F Aug Aug Aug Aug Sep
2.3 -4.9 1.0 0.1 1.8 0.1 0.2 61.0
2.3 -5.0 1.0 0.1 1.9 0.0 0.2 61.0
Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday
17/09/2015 17/09/2015 17/09/2015 17/09/2015 17/09/2015 17/09/2015 17/09/2015 17/09/2015 17/09/2015 17/09/2015
01:50:00 09:30:00 09:30:00 09:30:00 09:30:00 10:30:00 14:30:00 16:00:00 20:00:00 20:30:00
JP NL CH CH CH GB US US US US
Merchandise trade exports - % yoy Unemployment rate SNB 3-month ibor lower target SNB 3-month ibor upper target SNB Sight Deposit Interest rate Retail sales - % mom Housing starts - % mom Philadelphia Fed - business confidence - index Targe range for fed funds rate Fed Chair Yellen holds press conference
Aug Aug Sep 17 Sep 17 Sep 17 Aug Aug Sep Sep 17 Sep-17
7.6 6.8 -1.3 0 -0.75 0.1 0.2 8.3 0-0.25%
Friday
18/09/2015
09:30:00
NL
Consumer confidence - index
Sep
6
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
ABN AMRO
0.1 1.9 -0.1 0.2
6.8 -1.3 0 -0.75 -4.5 5.9 0.25-0.50%
-4.0 7.0 0-0.25%
7