There’s an interesting reason why the Fed might not be able to hike rates in 2016

Deutsche Bank has an interesting argument for why the Federal Reserve may not be able to raise interest rates at all this year.

In a note Monday, Deutsche Bank chief US economist Joe LaVorgna argues that the Fed may be unable to move because its policy meetings coincide with key events on the election calendar.

The Federal Reserve expects to raise its benchmark rate twice this year.

LaVorgna said a rate hike in April is unlikely because of expectations for weak first-quarter growth.

As for June, the Fed’s hands may be tied for the same reason. Also there’s the British EU referendum a week after the Fed meeting on June 23 that, combined with a rate hike, could spike the dollar.

Here’s LaVorgna on the other meetings (emphasis ours):

While a rate hike at the July 26-27 meeting is possible, its odds are somewhat reduced by the fact that there is no press conference after this meeting. Note also that this meeting coincides with the Democratic National Convention (
July 25-28) and is only a few days after the Republican National Convention (July 18-21). The September 20-21
FOMC meeting is relatively close to the Presidential Election (November 8), so unless there is strong evidence that the US economy is growing above trend, and global financial markets are relatively stable, we expect the Fed to refrain from hiking in September. We highly doubt the Fed would raise rates at its November meeting, which is six days before the US election.

We haven’t yet seen any huge market moves based on projections for the elections, who has won certain key states, and so on.

However, several strategists have written that the final results could be a risk to investors at the end of the year.

For example, David Bianco, chief US equity strategist at Deutsche Bank, wrote last month that the S&P 500 would likely stay in a narrow range until investors get a clear sense of the America’s political future. And the first good snapshot will only come on November 4.

And by that time, the Fed would perhaps also be able to shift focus solely on the economy.

“If by the December 13-14 FOMC meeting underlying GDP growth were tracking above 2%, then perhaps the Fed could raise rates,” LaVorgna said. “The futures market is signalling essentially the same scenario: The implied probability of one 25 basis-point rate hike this year is barely above 50%. Given our tepid expectations of real GDP growth, the risk is that the Fed does not hike at all this year.”

Screen Shot 2016 04 11 at 2.08.06 PM
The FOMC’s 2016 calendar Federal Reserve

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