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14 May 2015
Fed’s bar for tightening lower than what market expects – DB
FXStreet (Barcelona) - Alan Ruskin, Macro strategist at Deutsche Bank, explains that the conditions for rate lift-off by Fed are likely lower than what market presumes, and that the bond market volatility will be another feature which could constrain the rate hike move.
Key Quotes
“As for the Fed story, it now looks like we will need a minimum of a couple of months of decent data to lead to any return in confidence in a September rate hike.”
“The Fed’s bar for tightening is however likely to be lower than the market presumes, because: i) even softer payrolls of say 150K a month will drive the unemployment rate below 5% by year-end; ii) real rates are extremely accommodative for an economy running with very limited spare capacity, something the Fed has been at pains to impress upon the market; iii) provided the back-end is well behaved, tightening will not lead to much slowing, but it will iv) expose any financial excesses related to QE and zero rates, contributing to financial stability; and v) allow the Fed some scope to ease from positive nominal rates if there is any genuine slowdown in the future. The big proviso to iv) and v) above, is that relative stability in the bond market is a necessary condition.”
“Bond instability/volatility is arguably the new additional feature that could constrain the Fed and should be notched up as a USD negative factor, if it proves a persistent feature of the financial market landscape.”
“Lastly to provide a broad perspective, despite all the monthly and quarterly noise in the data, the US’s growth trends are shockingly stable: real GDP growth has averaged 2.3% in 2012, 2.2% in 2013 and 2.4% in 2014.”
“Going forward, the second differential of GDP levels will be very important for the Fed. Growth needs to show it is not decelerating from the above 2.25% - 2.5% type growth rates, or the Fed will be very reluctant to do anything to compound a loss of growth momentum. If growth can record 2.25 – 2.5% type numbers it will warrant a tightening this year, probably by September.”
“The story above says that bringing the Fed rate hike forward from being fully priced in for January 2016 to fully pricing in for September 2015, without a corresponding shift in the BOE or ECB expectations should help the USD by at least 4% versus the pound and EUR.”
Key Quotes
“As for the Fed story, it now looks like we will need a minimum of a couple of months of decent data to lead to any return in confidence in a September rate hike.”
“The Fed’s bar for tightening is however likely to be lower than the market presumes, because: i) even softer payrolls of say 150K a month will drive the unemployment rate below 5% by year-end; ii) real rates are extremely accommodative for an economy running with very limited spare capacity, something the Fed has been at pains to impress upon the market; iii) provided the back-end is well behaved, tightening will not lead to much slowing, but it will iv) expose any financial excesses related to QE and zero rates, contributing to financial stability; and v) allow the Fed some scope to ease from positive nominal rates if there is any genuine slowdown in the future. The big proviso to iv) and v) above, is that relative stability in the bond market is a necessary condition.”
“Bond instability/volatility is arguably the new additional feature that could constrain the Fed and should be notched up as a USD negative factor, if it proves a persistent feature of the financial market landscape.”
“Lastly to provide a broad perspective, despite all the monthly and quarterly noise in the data, the US’s growth trends are shockingly stable: real GDP growth has averaged 2.3% in 2012, 2.2% in 2013 and 2.4% in 2014.”
“Going forward, the second differential of GDP levels will be very important for the Fed. Growth needs to show it is not decelerating from the above 2.25% - 2.5% type growth rates, or the Fed will be very reluctant to do anything to compound a loss of growth momentum. If growth can record 2.25 – 2.5% type numbers it will warrant a tightening this year, probably by September.”
“The story above says that bringing the Fed rate hike forward from being fully priced in for January 2016 to fully pricing in for September 2015, without a corresponding shift in the BOE or ECB expectations should help the USD by at least 4% versus the pound and EUR.”