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3 Mar 2015
US deflation might push Fed’s rate hike to Q4 2015 – Rabobank
FXStreet (Barcelona) - Philip Marey, Senior US Strategist at Rabobank, assess the inflation scenario in the US and predicts the Fed to hike rates no earlier than Q4 of this year, expecting inflation to turn to positive territory around the same time period.
Key Quotes
“In January, the CPI inflation rate dropped below zero (-0.1% year-on-year), the first negative reading since October 2009. However, the strength of the domestic economy continues to support core inflation (1.6%), which should keep the current episode of deflation a temporary phenomenon.”
“Nevertheless, the fall in headline inflation causes a dilemma for the Fed. On the one hand, the Fed sees this deflation as transitory –because it can largely be attributed to an oil price decline and the appreciation of the US dollar– and even beneficial to household purchasing power.”
“On the other hand, raising the policy rate in a period of negative inflation readings may give the impression that the Fed does not take the price stability component of its dual mandate very seriously.”
“In fact, the FOMC is already monitoring the inflation expectations of consumers and financial markets closely. The latter have declined sharply and a number of FOMC participants indicated at the January meeting that they would like to see either an increase in market-based measures of inflation expectations or evidence that low readings did not constitute grounds for concern, before hiking the fed funds rate.”
“All’n all, the FOMC would like to see more evidence that inflation is going to return to its 2% target before the first rate hike. However, we think it may take some time before the data are going to convince the FOMC.”
“It may take until the final quarter of the year before inflation returns to positive territory. Therefore, we continue to have our doubts about a June rate hike and we still think that Q4 is more plausible.”
Key Quotes
“In January, the CPI inflation rate dropped below zero (-0.1% year-on-year), the first negative reading since October 2009. However, the strength of the domestic economy continues to support core inflation (1.6%), which should keep the current episode of deflation a temporary phenomenon.”
“Nevertheless, the fall in headline inflation causes a dilemma for the Fed. On the one hand, the Fed sees this deflation as transitory –because it can largely be attributed to an oil price decline and the appreciation of the US dollar– and even beneficial to household purchasing power.”
“On the other hand, raising the policy rate in a period of negative inflation readings may give the impression that the Fed does not take the price stability component of its dual mandate very seriously.”
“In fact, the FOMC is already monitoring the inflation expectations of consumers and financial markets closely. The latter have declined sharply and a number of FOMC participants indicated at the January meeting that they would like to see either an increase in market-based measures of inflation expectations or evidence that low readings did not constitute grounds for concern, before hiking the fed funds rate.”
“All’n all, the FOMC would like to see more evidence that inflation is going to return to its 2% target before the first rate hike. However, we think it may take some time before the data are going to convince the FOMC.”
“It may take until the final quarter of the year before inflation returns to positive territory. Therefore, we continue to have our doubts about a June rate hike and we still think that Q4 is more plausible.”