In the wake of hawkish remarks from US Federal Reserve officials at last week’s Jackson Hole symposium, including from Janet Yellen, the prospect of a US rate hike this year — seen as unlikely before the event — is now back on the table.
Stocks have fallen, bond yields have risen as has the US dollar.
While markets now believe that a rate increase, perhaps as soon as September, could be on the cards, Kevin Logan, chief US economist at HSBC securities, believes that not much has actually changed following the conclusion of the event.
Here’s why he believes Yellen is still a policy dove.
The Fed (is) in a stance of watchful waiting, which is exactly where it was at the end of the last FOMC meeting in July. The policymakers are leaning toward a rate hike, but feel that they can wait until they are more confident that the expansion will continue at a sustainable pace and that inflation will rise toward their 2% target. For that they will need more data.
And, as a result of this, Logan believes it’ll be sometime yet until the Fed feels confident enough to lift rate again.
In our view, the data, especially for inflation, will still fall short of the threshold for a rate hike at the next FOMC meeting in September. In addition, declining business investment spending has been a drag on the economy for the past three quarters. Data released today on economy-wide corporate profits showed a year-over-year decline of 4.9%. That makes five quarters in a row of year-over-year profit declines, and is a prime reason why business investment spending has been contracting. We think the FOMC will hesitate to tighten policy in the face of this profits’ recession since a turnaround in profits is normally a prerequisite for a pickup in investment spending.
We continue to think that inflation will remain below the Fed’s 2% target this year and that a rate hike will be delayed until mid-2017.
Financial markets currently price a 76% probability that the Fed will raise rates once in 2016, taking the fed funds rate target to between 0.5% to 0.75%.
Friday’s US non-farm payrolls report for August is being cited by many analysts at a potential catalyst to bring forward a potential rate hike at the FOMC’s September 20-21 meeting.
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