Fed: No longer expect to hike rates in 2016 - RBS

Research Team at RBS, suggests that in the wake of the Brexit vote, they no longer expect the Fed to hike rates in 2016 and, for now, are removing any tightening from their 2017 forecast as well.

Key Quotes

“While we think the hurdle for a rate cut -- or more Fed accommodation of any kind -- at this time is quite high, we are no longer confident that the next Fed move will be to hike. The timing and direction of the next move will depend on how destabilizing the Brexit vote ultimately is to financial markets and the global economy.

Even under a "best case" scenario (one in which financial markets settle fairly quickly), the downside risks associated with Brexit will persist, and the existence of those risks will keep the Fed on hold for the foreseeable future. Fed Chair Yellen has repeatedly espoused a risk management approach to policy. Even before Brexit, the Fed saw “considerable uncertainty” with the outlook and signaled no urgency to act. In the wake of Brexit, uncertainty has not only increased, but is also likely to prove more lasting.

Looking beyond the US presidential elections in November, political risks in the euro area will extend well into 2017, with national elections required in both France (by May 2017) and Germany (by October 2017), and potential EU referendums in other nations (e.g. Sweden) as well. In addition, monetary policy divergence (with easing now expected from the BOE, ECB and BoJ) should keep upward pressure on the dollar, which in turn will fuel concerns over a potential China devaluation.

Against this backdrop of persistent global uncertainty, Fed Chair Yellen is unlikely to feel comfortable enough to consider hiking rates in the foreseeable future. At some point, rate hikes may be possible but the timing is sufficiently distant (and global developments sufficiently uncertain) that we see no value in forecasting additional hikes at this time. Moreover, under a “worst case” scenario (one in which the fallout from Brexit is greater than expected), a change in direction from the Fed cannot be entirely ruled out.”