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Fed is going to hike in December - Rabobank

FXStreet (Delhi) – Philip Marey, Research Analyst at Rabobank, suggests that the US economy is close to the Fed’s finish line, and that it will take more evidence of a negative impact from global developments on the US economy to convince the majority in the FOMC to delay the first rate hike to next year. If this evidence does not arrive, the Fed is going to hike in December, the analyst further adds.

Key Quotes

“The FOMC did acknowledge the disappointing Employment Report for September by saying that the pace of job gains slowed and that the unemployment rate held steady. However, they stressed that labour market indicators, on balance, show that underutilisation of labour resources has diminished since early this year.”

“This is in line with our argument that labour market slack is already close to the Fed’s finish line, despite the slowdown in employment growth in September. With respect to economic growth, the FOMC said that household spending and business fixed investment have been increasing at solid rates (instead of ‘moderately’ in the September statement), underlining the strength of domestic demand.”

“The GDP report for Q3, released one day after the FOMC meeting ended, was in line with the Fed keeping the door to a December rate hike wide open. While 1.5% GDP growth (quarter-on-quarter, at an annualized rate) may be disappointing at first sight, we should take into account that inventories subtracted 1.4%- point from the growth figure. In this light, a GDP growth rate of 1.5% is not that bad.”

“More importantly, domestic demand remained strong with 3.2% consumption growth and 6.1% residential investment growth. Foreign developments are likely to remain a drag on Q4, but inventories are not likely to take another large bite out of GDP growth.”

“Meanwhile, the recent budget deal on Capitol Hill will extend the debt limit to March 2017, removing the threat of a government default in November.”

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