9 Jul 2015
International developments cast doubt on Fed rate hike this year - BTMU
FXStreet (Barcelona) - The Research Team at Bank of Tokyo-Mitsubishi UFJ, reviews the FOMC Minutes, and note that the escalating concerns over Greece, China and other emerging market economies has prompted the Fed to questions its rate hike plan for this year.
Key Quotes
“The US dollar has weakened modestly in the Asian trading session against most other currencies following the release of the latest FOMC minutes from their meeting on the 17th June. The minutes added little additional insight into the outlook for Fed policy.”
“After their last meeting the Fed signalled that they remained on course to raise rates this year although their updated projections for the Fed funds rate signalled that it was becoming more likely that the fist rate hike would be delivered later this year and that the subsequent pace of tightening would be more gradual.”
“The minutes were consistent with that view as they revealed that policymakers saw economic conditions as continuing to approach those consistent with warranting tighter monetary policy at some point. However, all but one participant indicated that they would need to see more evidence that economic growth was sufficiently strong.”
“The minutes also revealed that several officials mentioned their uncertainty about whether Greece and its official creditors would reach an agreement and about the likely pace of economic growth abroad, particularly in China and other emerging market economies. Both concerns have escalated since the FOMC’s last policy meeting which has prompted the market to question whether the Fed will begin to raise rates at all this year.”
“Renewed weakness in the price of crude oil and other commodities are also weighing down on US rates by dampening inflation expectations. The recent decline in US rates particularly at the short-end end of the curve is helping at least temporarily to dampen the potential for the US dollar to strengthen driven by negative developments overseas which should increase its relative attractiveness.”
“The US economy has returned to more solid growth and is less vulnerable to negative contagion. However, a further sharp strengthening of the US dollar would likely dampen the outlook for US growth and inflation supporting an even more gradual pace of Fed rate hikes.”
“San Francisco Fed President Williams also spoke overnight and struck a more optimistic tone stating that he still expects the Fed to raise rates this year playing down international risks to the US economy. He noted that although there are risks from Greece, they are “unlikely to overturn the otherwise strong fundamentals of the US economy”. He expects the ECB to limit the negative financial fallout that could affect the rest of the euro-zone, and views a sizeable financial and economic shock to the global economy from Greece as remaining an unlikely tail risk. He also downplayed concerns over slowing growth in China where he believes that policymakers have the tools and will to sustain growth near to their target.”
Key Quotes
“The US dollar has weakened modestly in the Asian trading session against most other currencies following the release of the latest FOMC minutes from their meeting on the 17th June. The minutes added little additional insight into the outlook for Fed policy.”
“After their last meeting the Fed signalled that they remained on course to raise rates this year although their updated projections for the Fed funds rate signalled that it was becoming more likely that the fist rate hike would be delivered later this year and that the subsequent pace of tightening would be more gradual.”
“The minutes were consistent with that view as they revealed that policymakers saw economic conditions as continuing to approach those consistent with warranting tighter monetary policy at some point. However, all but one participant indicated that they would need to see more evidence that economic growth was sufficiently strong.”
“The minutes also revealed that several officials mentioned their uncertainty about whether Greece and its official creditors would reach an agreement and about the likely pace of economic growth abroad, particularly in China and other emerging market economies. Both concerns have escalated since the FOMC’s last policy meeting which has prompted the market to question whether the Fed will begin to raise rates at all this year.”
“Renewed weakness in the price of crude oil and other commodities are also weighing down on US rates by dampening inflation expectations. The recent decline in US rates particularly at the short-end end of the curve is helping at least temporarily to dampen the potential for the US dollar to strengthen driven by negative developments overseas which should increase its relative attractiveness.”
“The US economy has returned to more solid growth and is less vulnerable to negative contagion. However, a further sharp strengthening of the US dollar would likely dampen the outlook for US growth and inflation supporting an even more gradual pace of Fed rate hikes.”
“San Francisco Fed President Williams also spoke overnight and struck a more optimistic tone stating that he still expects the Fed to raise rates this year playing down international risks to the US economy. He noted that although there are risks from Greece, they are “unlikely to overturn the otherwise strong fundamentals of the US economy”. He expects the ECB to limit the negative financial fallout that could affect the rest of the euro-zone, and views a sizeable financial and economic shock to the global economy from Greece as remaining an unlikely tail risk. He also downplayed concerns over slowing growth in China where he believes that policymakers have the tools and will to sustain growth near to their target.”