FOMC Retains Optionality; We Keep Our Call For 2 Hikes In 2016 - Barclays

FOMC Retains Optionality; We Keep Our Call For 2 Hikes In 2016 - Barclays

28 April 2016, 12:18
Vasilii Apostolidi
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As we expected, the FOMC took a cautious interpretation of domestic and external developments at its April meeting. As such, we retain our baseline outlook for two rate hikes for the remainder of the year, but the timing will be highly dependent on the evolution of domestic activity and external risks. While our forecast continues to call for a rate hike in June, the hurdle is high and the second hike could slip to July or September should progress toward the dual mandate occur slower than we anticipate.

 

....We retain our baseline outlook for two rate hikes in 2016, but the timing of the next hike remains fluid, and risks are skewed to only one. Given the outcome of the April statement and optionality for policy, we retain our view that the economy will evolve in a manner consistent with two rate hikes this year. Our outlook calls for those in June and December. That said, the timing of a mid-year hike is complicated by, among other factors, the degree to which US activity rebounds in Q2 and whether financial market stress intensifies as a result of the UK referendum.

Hence, the statement, as written, gives the committee flexibility to evaluate the June-July-September period for its next move. If domestic activity rebounds slowly, market stresses accelerate ahead of the UK referendum, or other external factors arise, it can defer its next policy move and the risk to our baseline is that the Fed only raises rates once this year. In contrast, should the economy improve and external risks diminish, a rate hike in the June-July-September period is likely on the table, as would be another one before year-end.

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