Fed: After minutes, we still expect no rate hike during 2016 (close call) - Danske Bank

Analysts from Danske Bank continue to project that the Federal Reserve will keep rates unchanged in December (after yesterday’s FOMC minutes) but they warn that is a close call.

Key Quotes: 

“The FOMC minutes from the September meeting confirm that we are dealing with a very divided FOMC and that there is a ‘bird fight’ among the hawks and doves in the FOMC. Hawks think that risks are that the economy overheats as employment has increased over the past six years and that low rates create financial instability. Doves think that there are signs that labour market slack has been larger than previously expected since the unemployment rate and underemployment rate have been flat for the past year. In their view, the Fed can afford to stay patient as core inflation runs below 2% and there is little sign of increasing underlying inflation pressure as wage growth is subdued.”

“We do not change our Fed call based on these minutes, as they confirm more or less what we already knew due to the many Fed speeches since the last meeting. For now we stick to our non-consensus view that the Fed will stay on hold for the rest of the year, although it is a close call whether the Fed will hike or not in December. The reason for our call is that the Fed seems too optimistic on Q3 GDP growth and we fear that economic data may continue to disappoint in the short term. Incoming data will be important for the Fed’s decision to hike or not later this year. The combination of weak GDP growth over the past three quarters, still slack left in the labour market, subdued wage growth, low inflation expectations and core inflation continuously running below the 2% target, means that the Fed can afford to stay patient.”

“A November hike seems unlikely due to the Presidential election just a week after the next FOMC meeting. As the jobs report was not the smoking gun for the Fed, we are looking forward to Friday, when we get retail sales data for September and Fed Chair Yellen is due to speak. Both could be important for our Fed call, as retail sales have been weak in July and August and since Yellen sounded more dovish at the press conference after the September meeting than the tone in the FOMC statement.”