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Fed tightening creates the 2016 profile – ING

FXStreet (Delhi) – Research Team at ING, suggests that predicting the lift-off for Fed tightening has been a thankless task this year.

Key Quotes

“For those, ourselves included, who saw an earlier Fed lift-off, the delay in tightening looks largely down to the Fed underestimating the impact of the strong dollar and lower energy prices on growth and inflation.”

“Vice Chairman of the Federal Reserve Board, Stanley Fischer, delivered an excellent speech on this subject on 12 November. He presented the findings of Federal Reserve staff, who assessed the impact on US growth and core inflation of a 10% appreciation in the dollar. For reference, the appreciation of the Fed’s broad trade-weighted dollar has been hovering in the 10-14% YoY area since March.”

“What makes the Fed’s findings so relevant to our late-cycle analogy is that the impact of dollar strength is much more transitory on inflation than growth. The peak impact on US core inflation is felt within two to three quarters, while the peak impact on growth does not hit until eight-to-twelve quarters.”

“This suggests that while the Fed may be responding to the outlook for higher inflation in 2016, the effects of the 2015 dollar rally will still be working their way through the activity numbers. Yet it seems clear that the Fed has the confidence to embark on its tightening cycle in December and the speed at which it will tighten has important ramifications for the dollar’s profile in 2016.”

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