Fed rates: Stronger dollar might keep the Fed on hold for longer – ING

FXStreet (Barcelona) – Rob Carnell, Chief International Economist at ING, presents the case of US rate hike and the state of the economy, and further forecasts the Fed to hike rates only once in 2015.

Key Quotes

“As far as the house forecasts go, we have taken the second rate hike out of 2015, leaving a further 75bp of tightening in 2016, and another 75bp in 2017. In this, we are in line with Fed funds futures which have an implied yield of 1.755% by the end of 2017, and substantially below the guidance from the Fed, which still looks unrealistically aggressive.”

“Our thinking on rates is that although the US economy is doing reasonably well, at least relative to G7 peers, it has, in recent years, been the beneficiary of some helpful tailwinds, many of which are no longer present, have already reversed or will soon do.”

“The first of these was a weak currency, courtesy of Fed QE, which has now been partially undermined by the activities of the ECB. To our surprise and evidently to the surprise of the Fed (mentioned in the May FOMC minutes and more recently by the Fed’s Lael Brainard), the dollar’s recent strength seems to have had a more dampening impact on the economy than many predicted. And as such, it may have a greater influence on the Fed than anticipated.”

“A second factor has been the weakness of the boost to spending from the earlier fall in oil prices.”

“…the US economy is in bad shape, but it is probably fair to assume that the sustainable rate of growth is closer to 2.5% than 3.0%. Moreover, the shift from being supportive, through a neutral to perhaps a slightly negative backdrop in the event of tighter monetary policy, low but slowly rising oil prices and a possibly stronger dollar, is likely to bias growth to the lower side of 2.5%. Raising rates at every meeting or even at every press briefing seems highly unlikely in this event.”

“What our forecasts do not show is that it is quite possible that soft patches like the one we have just seen will result in reversals of earlier Fed tightening over coming years. It is not a given that, from here, as far as rates go, the only way is up. Rather than add spurious reversals to the forecasts, we hope to convey this sense of non-linearity with occasional pauses in rates.”

Rob Carnell, Chief International Economist at ING, presents the case of US rate hike and the state of the economy, and further forecasts the Fed to hike rates only once in 2015.

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