US: September Quarter to Be the Likely Timing of the Next Fed Funds Rate Hike - BNZ

US: September Quarter to Be the Likely Timing of the Next Fed Funds Rate Hike - BNZ

Research Team at BNZ, have recently changed their view on the likely timing of the next fed funds rate, moving it to the September quarter 2016.

Key Quotes

“The rationale was the tightening in financial conditions, an expectation that bouts of financial volatility are unlikely to go away soon, and further indications that inflation expectations are falling, all of which would induce Fed caution.

Of course, the latest FOMC statement has sounded less keen on rates than it did in December. However, the chances of a move in the June quarter should not be rated negligible. This reflects several factors: signs that the economy remains on track and the recovery in financial conditions (i.e. less downside risk), as well as stronger than expected inflation.

We expect the Fed will remain relatively cautious, and still think the September quarter is the most likely timing for the next hike. The Fed will want to see confirmation that the tightening in financial conditions in January and February did not affect the economy.

On the inflation side it will be concerned about the downwards trend in measures of inflation expectations. Moreover, we would not be surprised if annual core inflation gave up some of its gains in coming months due to base effects (relatively strong core PCE inflation in the February to June 2015 months dropping out of the calculation). Perhaps more importantly, the factors that produced the recent bout of financial market turbulence have not gone away, including uncertainty about the strength of the global economy, suggesting that financial markets will remain volatile.”

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