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We feel surer now about the Fed

Genevieve Signoret

13 September 2015

Macro Views

We feel surer now than we did two weeks ago that the Fed will hold its target federal funds rates at 0.00–0.25% on Thursday 17 September. Market volatility on its own has tightened financial conditions, raising the cost of capital and rendering risk taking more treacherous.

With high uncertainty, we now forecast that the Fed will hike in October. We’re poised to switch that call to March 2016 if by the end of September we see volatility still high or Chinese macro indicators collapsing.

Remember that the first Fed hike is not just a hike, it’s the start of “normalization” (Genevieve explains this more fully here). The Fed will not only ever so slightly raise rates but also introduce a new tool kit consisting of a trio of rates—the familiar federal funds rate inside a band of two additional rates: the overnight reverse repo rate (ON RRP)  and the interest rate on excess reserves.

It’s true that markets worry that the Fed may tighten prematurely, sparking either a global recession or, to prevent one, being forced to backtrack later with its credibility depleted. But that’s not all they worry about. They fear also that Fed adoption of its new tool kit may cause havoc at first. These two new rates are yet untested on a large scale; the Fed may flail around a bit when first deploying them.

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We have updated our forecast tables and assumptions. We now expect China to post growth rates no higher than 7.0% in 2015 and 6.5% in 2016 and for Banxico, like the Fed, to raise rates in October, no longer September. The Fed will announce on October 28 and Banxico will do so the very next day. This moves our Banxico call to quarter four from quarter three to align with our call for the Fed given our view repeated often here that Banxico will hike immediately after the Fed does. Note that, if we end up switching our Fed call from October 2015 to March 2016, we’ll follow suit for Banxico.

We’ve updated our central scenario climate assumption to state that the El Niño episode will be severe. This reinforces our perception that global macro risks are more acutely skewed to the downside than they were back last January when we first laid out our current set of scenarios.

Next four weeks

Events in red are those most likely to shake markets.

Monday 14 September

  • Japan: Monetary policy decision.
  • India: Consumer prices (Aug).
  • Euro Area: Industrial production (Jul).
  • Italy: Consumer prices (Aug).

Tuesday 15

  • Russia: Industrial production (Aug).
  • Turkey: Unemployment (Jun).
  • UK: Consumer prices (Aug).
  • France: Consumer prices (Aug).
  • USA: Retail sales (Aug), industrial production (Aug).

Wednesday 16

  • Japan: Foreign trade (Aug).
  • UK: Unemployment (Jul).
  • USA: Consumer prices (Aug).

Thursday 17

  • Russia: Unemployment (Aug), retail sales (Aug).
  • Italy: Foreign trade (Jul).
  • USA: Monetary policy decision.

Sunday 20

  • Greece: General elections

Monday 21

  • Spain: Foreign trade (Jul).
  • Mexico: Monetary policy decision.

Wednesday 23

  • Euro Area: Markit manufacturing & composite PMI (Sep, flash).
  • Germany: Markit manufacturing, services & composite PMI (Sep, flash).
  • France: GDP (Q2), Markit manufacturing, services & composite PMI (Sep, flash).
  • USA: Markit manufacturing PMI (Sep, flash).

Thursday 24

  • Japan: Consumer prices (Sep).
  • USA: Durable goods orders (Aug), unemployment claims.
  • Brazil: Unemployment (Aug).

Friday 25

  • Euro Area: Money supply.
  • USA: GDP (Q2, 3rd estimate), Markit services & composite PMI (Sep, flash), Michigan consumer sentiment and inflation expectations (Sep, flash).
  • Mexico: Foreign trade (Aug).

Monday 28

  • USA: Monetary policy speech: Evans (2015 voter), personal income.

Tuesday 29

  • Japan: Industrial production (Sep, flash).
  • Spain: Consumer price index (Sep, flash).
  • USA: Consumer confidence (Oct).

Wednesday 30

  • China: Markit manufacturing PMI (Sep).
  • Korea: Industrial production (Sep).
  • Japan: Bank of Japan Tankan (Q3).
  • Euro Area: Unemployment rate (Sep).
  • UK: GDP (Q2, final)
  • USA: Monetary policy speeches: Yellen.

Thurday 1 October

  • Global: Markit manufacturing PMI (Oct).
  • Japan: Unemployment rate (Sep).
  • Korea: Foreign trade (Aug), consumer price index (Sep).
  • Russia: GDP (1Q-2Q, final).

Friday 2

  • USA: Unemployment rate and nonfarm payrolls (Sep), monetary policy speech: Fischer.

Monday 5

  • Global: Markit services PMI (Oct).
  • Mexico: Banxico monetary policy meeting minutes (29 Oct).

Tuesday 6

  • Euro Area: Eurogroup meeting.

Wednesday 7

  • Germany: Industrial production (Sep).
  • UK: Industrial production (Sep).
  • Spain: Industrial production (Sep).

Thursday 8

  • China: Markit services PMI (Oct).
  • UK: Federal Reserve monetary policy meeting minutes (16-17 Sep).

Friday 9

  • Global: World Bank annual meeting.
  • India: Foreign trade (Sep).
  • France: Industrial production (Oct).
  • Italy: Industrial production (Oct).
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