central bank of United States of America

Guessing Game Goes On …

Yes the wait continues but not for very long more we think – the first lift out in Federal Funds rate from the current near zero of 0.125% to likely 0.375% before the year is up.

Following the latest September FOMC meeting this past week in US, Janet Yellen and company has chosen to thread carefully after the recent stock market rout in China causing worldwide stock markets to go into a tailspin. Last year we had the unexpected oil price crash, this year we had the sudden devaluation of the yuan by the Chinese government who probably has similar repercussions in financial markets globally where its full effect is not fully clear.

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Notwithstanding the twin mandate of managing inflation and unemployment for US economy per se, US Fed did cite global economic weakness and financial market turmoil in its consideration for the delay in lift out this month. In particular it said that more time is needed to ascertain the full impact of these global gyrations to the US economy. Even though US exports to Chia forms only 1% of its GDP, it admitted the spillover impact to US from Chinese trade with other countries. It however noted the rapidly improving US labor market but still more evidence is needed to this end to bolster the committee’s confidence that inflation will move towards its 2% target in the medium term.

The Fed asummarized its assessment of the US economy and adjusted some of its forecasts as follows :

  • US economy rebounded strongly in 2ndquarter which led to Fed revising up its GDP growth forecast for the full year from 1.9% to 2.1% back in June; however with the recent market turmoil it has now adjusted the growth for 2016 down from 2.5% to 2.3%.
  • Fed also expected a slower rise in rates after the first lift off by adjusting its forecast for funds rate lower to 625% by end 2017. Its longer run normal rate is also adjusted down from 3.75% to 3.5%.
  • It noted consumer spending and business investment have advanced moderately while housing market “has improved further”.
  • It now forecast unemployment rate to go down to 4.8% by end of 2016 from the current 5.1% which is a signal for coming upsurge in wages as companies compete for fewer available workers.
  • On inflation, with continued low oil price and strong dollar going forward, it reduced the pace of its pickup and revised down the forecast to 7% and 1.9% in 2016 and 2017 respectively, indicating that it will still not reach the Fed’s target of 2% even in next 2 years. This is a hint of very subdued rate hikes after the first lift off.

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The first rate hike in nearly a decade now seems set for Fed’s next 2 FMOC meeting scheduled for October and December. As October tends to be a jittery month for stocks, we think that if financial markets stabilize in the last quarter of the year the likely first lift off will now be December FOMC meeting.

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