US: Evidence for a June Hike Now Lacking - HSBC
Research Team at HSBC, recently cut their forecast for US 2016 average
growth to 1.8% from 2.0% on the back of the impact of disappointing
global growth, financial market turmoil, and continued weakness in the
oil and commodity sectors.
Key Quotes
“Now,
following the release of April employment data, which failed to clear
up for how long the effects of the turbulence in Q1 will be felt, we
change our forecast for the pace of hikes in the federal funds rate.
Given the FOMC’s data-dependency, we see the tepid employment data as
enough of a reason for the Committee to refrain from a rate hike at its
June meeting. Instead, we believe a hike will come in September. This
means we now forecast only one, not two, 25bp hikes for 2016. We expect
that two 25bp rate hikes will still be delivered in 2017, probably one
each in March and September, keeping the spacing between rate hikes at
six months.
The employment data was not that weak, but neither
was it particularly strong, in our view. If the data had been a bit
stronger, worries about the damage done to the outlook for the US
economy might have receded a bit. If the unemployment rate had fallen
instead of holding steady, confidence that inflation would start to pick
up in coming months might have strengthened. This did not happen.
William Dudley, President of the New York Federal Reserve Bank, said in
an interview that when the economy is growing just slightly above its
potential trend rate it will be approaching full employment relatively
slowly. In this case, “small changes in the growth rate can affect the
timing of monetary policy by several months,” he said. This fits with
our view that the FOMC will deliver only one hike this year.
There
is more economic data to come before the June FOMC meeting. If the
economic data are strong in coming weeks and inflation picks up, the
FOMC could send a signal at its June meeting that a rate hike as soon as
July was on the table. However, there is no press conference scheduled
at the July FOMC meeting, and we believe the Committee currently has a
preference for acting only at meetings with a press conference. In our
view, that makes September more likely for a rate hike than July even if
the data start to improve.”
