After a dovish outlook from the Federal Reserve on Wednesday, JP Morgan’s chief US economist Michael Feroli cut his forecast for the number of interest rate hikes by the FOMC in 2016 to 2.
Feroli, who previously had called for 3 hikes happening during the June, September and December FOMC meetings, also said the moves would come at unexpected times: July and December.
A July hike, said Feroli, makes sense since it accomplishes three goals for the FOMC, none of which have to do with their dual mandate of full employment and steady inflation, instead focusing on political concerns. Feroli writes:
“Indeed, the recent solid employment and inflation data may argue for a hike earlier than July. However, for a Committee already worried about global economic and financial developments, hiking a week ahead of the Brexit vote may be a tough sell. Moreover, moving at a meeting without a scheduled press conference could get that monkey off their back. Lastly, a July hike would lessen the likelihood of needing to adjust rates in September, taking the spotlight off of them in what could be a contentious autumn season.”
So in Feroli’s estimation, the Fed will be pushed off of rate hikes in June because of the UK referendum on whether or not to stay in the EU. Further, the Fed will likely not move in September just over a month ahead of the US presidential election.
Later in the note, Feroli argues that the economy is strong enough to handle more hikes, and said the Fed’s more dovish tone — cutting the projected number of hikes this year from 4 to 2 — is a function of the people on the committee.
“This occurred against a backdrop of an outlook for employment and inflation that differed little from the one anticipated at the end of last year,” he said. “As such the downward revision to the interest rate forecast could be said to be a ‘shift in the reaction function,’ which is just another way of saying the Committee is becoming inherently more dovish for a variety of reasons.”
Feroli also said that by the December meeting the strength of the underlying economy will be too obvious not to hike and should lead to 4 more hikes in 2017.
Source: JP Moran / Business Insider
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