Amid the chaos in global markets on Monday, economists at Barclays have made a big change to one of their biggest calls:
The Federal Reserve is now on hold until March 2016.
In a note to clients on Monday afternoon, Barclays economists Michael Gapen and Rob Martin write that US financial market conditions have deteriorated in recent weeks, and this has, in effect, tightened financial conditions already.
This move comes as many expected as recently as last month that the Fed would raise rates for the first time since July 2006 at their September 16-17 meeting.
Throughout the year, the Fed has made clear that it plans to raise rates, but the recent turmoil in financial markets has Barclays and others saying that the Fed will now wait. In this view, the market has had its way with the Fed.
Barclays writes that in addition to tighter financial conditions, “our decision to delay our outlook for the tightening cycle stems from the effects of a stronger US dollar, lower oil prices, and weak global demand on our outlook for US inflation.”
Although we continue to see economic activity in the US as solid and justifying modest rate hikes, we believe the Federal Reserve is unlikely to begin a hiking cycle in this environment for fear that such a move may further destabilize markets. Instead, we believe the FOMC will delay the start of the rate hike cycle beyond September as a means to offset tighter financial conditions while it evaluates the effect of recent volatility. Many FOMC members will want to see whether the recent moves in financial markets reflect greater weakness abroad than is currently apparent in available macroeconomic data… We move our call for the first rate hike from September 2015 to March 2016.
On the topic of financial conditions, Barclays notes that the firm’s measure of US financial stress has been pushed a full standard deviation above its long-term average…
… while the VIX — which measures market volatility — is at its highest level in nearly 4 years.
Interestingly, Gapen and Martin also write that they find sharp increases in the VIX, “[weigh] negatively on activity and employment.”
They add: “According to our previous research, the VIX can be viewed as a proxy for generalized macro uncertainty and its sharp rise in recent weeks is likely to suppress rates of investment and hiring.”
And of course, Gapen and Martin are economists, which means not only are they two-handed, but that they are wildly conditional in their assertions about the future:
Given the uncertainty around the current global outlook, the timing of the rate hike seems more uncertain than usual. Should this episode of financial market volatility prove transitory, the FOMC could raise rates in December. On the other hand, if the volatility proves durable or reveals greater than expected weakness in global activity, the FOMC may push the first rate hike beyond March.
So March. Or December. Or later.