The Fed is likely to gain time – Scotiabank


Fed will likely buy time

Derek Holt, Research Analyst at Scotiabank, Suggests That the markets will hang on any potential signals to an economy growing around 2.5% good enough for the Federal Reserve to contemplate the second rate hike of esta cycle as Q2 GDP growth and another Fed meeting dominate market attention.

Key Quotes

“Second quarter GDP accounts after the arrive officially FOMC statement. Like private forecasters, however, the Fed likely have a reasonable degree of comfort in the narrative surrounding a decent if unspectacular rebound in Q2 following the Q1 usual disappointment. Each of Bloomberg’s consensus, the Atlanta Fed’s ‘nowcast’ and our own estimate point to growth in the mid-two-handled zone.

The factors governing the FOMC outlook are, however, far more complex than just tracking the domestic economy. A statement-only effort by the Fed on July 27th and will defer fresh Forecasts Until a press conference following the Fed’s September August vacation. Inflation remains beneath target as Governor Tarullo notes while questioning any need to rush policy tightening. The outcome Brexit connotes complex after-effects, as NY Fed President William Dudley has Observed. It would seem to us That These two factors merit taking time to avoid an overly hasty interpretation of the Ability of the overall economy and markets to withstand US monetary policy tightening.

Among the complex considerations are rising duration and changed dynamics in the global bond markets That connote greater market potential for destabilizing effects in the wake of a Fed hike. Central forecast further easing of monetary policy at the BoJ, ECB, BoE and Numerous other banks: such as the RBA and RBI pose the risk of another downward adjustment to foreign bond yields. This would alter the carry trade bloc into dollar assets and lift demand With It for Treasuries and the USD.

Indeed, the broad dollar index has-been rising for some time already. USD strength Could the Fed’s do THEREFORE policy tightening, independent of Fed hikes and driven by external Developments. USD strength, in turn, spark another round of Could disinflationary currency pass-through effects into US inflation readings while further dampening US Export Competitiveness. Should the Fed fan Such effects through hints at rate hikes, then a overheating the dollar Risks it in destructive fashion. “