FXStreet (Guatemala) – Analysts at Rabobank explained that they think that the downside risks to the Fed’s rate projections are larger than the upside risks.
Key Quotes:
“Therefore, we do not expect the Fed to make the four rate hikes in 2016 implied by the dot plot. Instead, we think that they will hike only twice next year. This also implies that we expect further downward shifts in the median values of the dot plot, probably as soon as March.
There are several downside risks to the pace of the economic recovery. First of all, the strength of the US dollar continues to be a major headwind for exporting firms. Secondly, the global economy continues to be weak. What’s more, the downside risks to the Chinese economy going forward may be underestimated by the FOMC.
The inflation outlook also harbors downside risks to the Fed’s rate path. In the first place, if the recent decline in the oil price is not reversed, year-on-year oil price changes in the coming year will continue to drag down the headline inflation rate for the US. Secondly, any further dollar appreciation would slow down the rebound in core inflation.
Thirdly, muted wage growth may also slow down the return of inflation to its 2% target. Excessive amounts of discouraged workers and involuntary part-time workers continue to hold back wage pressures. In fact, the FOMC statement said that in light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal.
Meanwhile, more than seven years of almost zero policy rates may have created bubbles that could get popped now that the hiking cycle has started.”
(Market News Provided by FXstreet)