by As soon as the Federal Reserve hiked interest rates in December 2015, market participants wanted to know how soon they’d do it again. After January served up negative economic surprises and volatility in global financial markets, the Fed held its fire at its January 27 meeting. While a March hike seemed plausible just a month ago, Credit Suisse economists say the odds of a first-quarter rate increase have fallen south of 50 percent. June is now the most likely date for the next hike. When Federal Reserve Chair Janet Yellen laid out the outlook for the coming year at a press conference after the rate increase, the view of the Federal Open Market Committee (FOMC) was that global risks to U.S. growth had declined since the summer, when fears of a Grexit and a Chinese market crash weighed on global financial markets. Central bankers foresaw moderate economic growth and further strengthening in the U.S. labor market in 2016. January had other ideas, however. China fears came back to haunt the markets in a nearly perfect repeat of events that shook markets in August 2015. Chinese equities crashed on news of disappointing manufacturing data, leading to a global selloff of stocks and other risky assets. Chinese officials intervened in both the stock and foreign exchange markets, allowing the currency to devalue.
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Ashley Kindergan considers the following as important: Credit Suisse, Dana Saporta, Federal Reserve, Investing: Features, Janet Yellen, Monetary Policy, tightening
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As soon as the Federal Reserve hiked interest rates in December 2015, market participants wanted to know how soon they’d do it again. After January served up negative economic surprises and volatility in global financial markets, the Fed held its fire at its January 27 meeting. While a March hike seemed plausible just a month ago, Credit Suisse economists say the odds of a first-quarter rate increase have fallen south of 50 percent. June is now the most likely date for the next hike.
When Federal Reserve Chair Janet Yellen laid out the outlook for the coming year at a press conference after the rate increase, the view of the Federal Open Market Committee (FOMC) was that global risks to U.S. growth had declined since the summer, when fears of a Grexit and a Chinese market crash weighed on global financial markets. Central bankers foresaw moderate economic growth and further strengthening in the U.S. labor market in 2016.
January had other ideas, however. China fears came back to haunt the markets in a nearly perfect repeat of events that shook markets in August 2015. Chinese equities crashed on news of disappointing manufacturing data, leading to a global selloff of stocks and other risky assets. Chinese officials intervened in both the stock and foreign exchange markets, allowing the currency to devalue. Investors, nervous that the government might devalue the currency even further, have been pulling capital out of the country ever since – which in turn puts more downward pressure on the currency. “In our view, the urgency for the Fed to tighten policy again as soon as March has been falling with each passing day of market instability,” says Credit Suisse economist Dana Saporta.
The FOMC’s most recent statement subtly reflected greater concern about the U.S. economy, characterizing the growth in household spending and business investment as “moderate” instead of “solid,” as it did in December. Monetary policymakers also acknowledged that low energy prices will keep inflation subdued for the immediate future, though they didn’t change their expectation of achieving 2 percent inflation in the next two years. The Committee also sought its typical balance between acknowledging the chaos in global markets and trying not to alarm investors even further, noting that it “is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.”
A balance, it should be noted, that has been tilting negative of late. Citing global headwinds, Credit Suisse recently reduced its 2016 U.S. GDP forecast from 2.4 percent to 2.2 percent. U.S. exports declined for the second month in a row in December and were down 6 percent over the previous year, as a 23 percent rise in the value of the dollar since July 2014 continues to put pressure on exporters. A monthly survey from the Institute for Supply Management showed that U.S. manufacturing contracted for the second month in a row in December, while a Federal Reserve survey showed that industrial production was down 1.8 percent year over year. Finally, real consumption, which doesn’t count big-ticket items such as cars or building materials, looks to be coming in slightly weaker than expected, growing 1.75 percent over the previous year rather than the expected 2 percent.
Credit Suisse’s economists don’t expect China’s woes to seriously impact U.S. growth, as only a tiny fraction of American exports go to the Middle Kingdom. Besides, the labor market has been growing remarkably fast, adding an average of 220,000 new jobs to the economy every month in 2015. As the labor market tightens, wages should start to rise more quickly. That would be bad news for corporate profits, but would likely boost consumption, which has been the most important driver of GDP growth in recent quarters. A rally in risky assets or a sharp increase in oil prices could put a March rate hike back on the table, Credit Suisse says. Barring that, if the Fed raises rates in June, the bank’s economists think central bankers would try to fit two additional rate hikes in before the end of the year. The tightening cycle is likely still on — but it will probably be delayed a bit.