The Federal Reserve is unlikely to hike its policy rate from 0.25-0.50% at its 16th March 2016 meeting and may have little choice but to revise down its expectations to around 3 hikes for 2016 in its accompanying projections. In the 16th December“dot-chart”, the median expectation among the 10 voting Federal Open Market Committee (FOMC) members and 7 non-voting members was for four hikes this year (the weighted average was for a slightly less hawkish 91bp of hikes).
This would imply a hike every other meeting, most likely faster than the “gradual” approach Chairperson Yellen and other members have systematically referred to and too hawkish relative to the latest domestic and global macro data and market prices. Specifically, US GDP growth halved in Q4, with negative contributions from domestic investment, an inventory drawdown and net exports. Growth in the service sector has also slowed while a strong US dollar, weak global demand and capital spending cuts in the oil sector are weighing on the manufacturing sector (12% of the U.S. economy). Oil prices remain depressed and the dollar is still strong by historical standards.
Globally, real GDP growth slowed to around 2.8% yoy in Q4 2015 and likely slowed further in Q1 2016, dragged lower by contracting trade, particularly from China with exports and imports collapsing 25% yoy and 14% yoy, respectively, in February. Finally, while US and global equities have rallied in recent weeks, they are still down since the December meeting.
The Fed and markets are thus likely to remain sensitive to particularly weak numbers, with US inflation and retail sales numbers for January and Chinese inflation, investment, industrial output and retail sales data due for release between now and 16th March.
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