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.
“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.”