After Monday’s market turmoil, when a Chinese market crash boiled over into the rest of Asia, then Europe and the US, analysts are rushing to change their forecast for the Federal Reserve’s first post-crisis rate hike.
For quite some time, analysts have been calling September as the month of the first increase in rates since 2006. But that call (known as Team September) is getting less and less consensual by the hour.
Analysts are now piling out of September, rushing to call a rate hike in December or even the first half of 2016, reckoning that the additional strengthening of the dollar and a bit of market panic will be enough to give the Fed cold feet.
A chart from Goldman Sachs researchers shows just how much US financial conditions have already tightened, spiking in recent days:
Here’s what analysts have been saying over the last 24 hours.
Barclays analysts pushed out their expectation of the first US rate hike, from September to March 2016:
We move our call to for the first rate hike from September 2015 to March 2016. 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.
Here’s Nomura’s take, sent out even before yesterday’s market chaos was entirely clear:
We believe that the probability the FOMC will raise short-term interest rates for the first time in September has decreased materially while the probability of liftoff in December or no interest rate increase this year has increased. Nomura now only put a 20% probability of liftoff in September (previously 35%) while it has raised the likelihood of liftoff in December to 44% (previously 40%) and liftoff after December to 36% (previously 25%).
World First’s Jeremy Cook has also pushed along his rate hike expectation for both the US and UK:
Given yesterday’s moves I have moved my expectation of a Fed rate hike from September to December 2015 and a similar rise from the Bank of England from February 2016 to June 2016. I still don’t think that the Fed should wait but likely will now.
Morgan Stanley analysts also think December is now the more likely option left this year:
Ultimately, we think the Fed remains a cautious body that would want to see the dust settle before making a determination to move forward with a rate hike.They will likely take a pass on September, but we believe they will continue to stay hopeful of a hike in the not too distant future. We think that not too distant future is December. It is too early to throw in the towel on a rate hike this year — to do so at this point we think would send the wrong message to markets and risk pushing market jitters to greater heights.
And here’s the conclusion of Rabobank’s morning email on Tuesday:
An improvement in consumer confidence to 93.4 in August from 90.9 in July would be another encouraging signal. In other words, fresh set of US data should be relatively positive and would keep the Fed on the path of gradual monetary policy normalisation with a hike in December our in house view.
Andrew Parry at Hermes thinks the Fed will take a pass in September too:
The trade-weighted US dollar is marking new heights, compounding a slowdown in corporate profit growth, which looks vulnerable after six years of expansion. An interest rate rise by the Fed — more a virility symbol for the US economy’s robustness than an immediate economic necessity — would only compound the angst gripping investors. We expect Fed Chair Janet Yellen to stay her hand in September, as a consequence.
Societe Generale’s Aneta Markowska says the French investment bank is maintaining its September call:
Financial conditions will play the key role in the Fed’s decision to hike or not to hike at the September policy meeting. If current volatility persists for the next three weeks, the FOMC will almost certainly delay policy normalization. Since we do not have a crystal ball and prefer not to mark our Fed forecast to market on a daily basis, we maintain our call for a September lift-off while acknowledging that we have very little conviction in this or any other Fed forecast at this moment.
John Higgins, chief markets economist at Capital Economics, also doesn’t think the Fed will have been knocked off a September hike:
Our view, though, is that events in China are unlikely to deter the US central bank from hiking the federal funds rate in September and we continue to think that it will subsequently raise the federal funds rate faster and further than most expect.
Bloomberg economists Carl Riccadonna, Josh Wright and Richard Yamarone argue that if the Fed is going to hike this year, it may have to be September:
While December may be desirable in terms of having the longest opportunity to digest economic data, market conditions are not ideal for initiating a tightening cycle. October is a clumsy option because there is no scheduled forecast update or press conference, although one could be scheduled either at the time of the meeting, or even in advance — say at the September meeting. This may prove desirable if financial market volatility persists into early September. For the aforementioned reasons, September remains in play.