- FOMC minutes: Fed opted to wait in September on fear global slowdown could push inflation lower
- We expect Fed to wait until 2016 before raising interest rates
- ECB minutes point to increased downside risks – we see more QE in December
FOMC buys time on fears of impact of global slowdown
The FOMC minutes of the September meeting show that risks in emerging markets, particularly in China, raised concern at the Fed on the effects that these developments would have for the US economy and the inflation outlook. As a result, the Fed left its policy rate on hold during the September meeting. It seems that if these developments had not taken place a rate hike in September would have been likely.
Labour market almost there…
This meeting took place before the disappointing September job market report. Before these figures, Fed participants mentioned that the labour market had considerably improved and they thought that it would soon meet one of the criteria for policy normalization. For some, a broader improvement of the labour market, could require a temporary decline in the unemployment rate below its long-run normal level to speed up inflation to the 2% target.
…while inflation concerns appear to have increased
Some participants indicated that their confidence that inflation would gradually return to the 2% target ‘had not increased, in large part because of the recent global and financial developments’. They needed further confirmation that the economy would continue to expand at a moderate rate and labour market conditions would further improve. Forecasts released in September suggest that the 2% target would only be reached in 2018.
More time to see impact of external headwinds on US data
Participants mentioned some of the implications of a material slowdown in China and possible spillovers to other economies. For the US economy this would mean weaker trade and a further appreciation of the USD. This led some participants to judge that downside risks had increased for economic growth and inflation. We think the disappointing September jobs market report would only have increased the uncertainty. As such, the Fed will probably delay the rate hike to 2016 to give it more certainty that data is improving again and that downside risks from EM are easing. Our view is that the first hike will not come until June 2016. We don’t rule out a rate hike in March 2016 if this process turns out to run relatively quickly.
ECB meeting minutes: ‘broad agreement’ on downside risks
The account of the September Governing Council meeting, published earlier on Thursday, confirmed the dovish tone seen in President Draghi’s press conference after that meeting. The meeting account records that in the Governing Council’s ‘assessment of the risks surrounding the inflation outlook, there was…broad agreement that the risks were tilted to the downside, given lower commodity prices, a stronger euro exchange rate and a somewhat lower growth outlook’. There were also downside risks to growth as ‘recent developments in emerging market economies could have further adverse effects on global growth via both trade and confidence channels’. There was a need to await ‘greater clarity’ on these events, but the Council emphasised its ‘willingness and ability to act’.
ECB likely to step up QE in December
Our general sense from the account is that members judged that the outlook had deteriorated and risks had increased, but that it was too early to decide on further action at that point. However, the situation has not turned for the better since September, while the Fed’s delay will put upward pressure on the euro if the ECB does not act. Our base scenario is that the ECB will step up its QE programme in December. We expect it to raise the monthly purchase amount by EUR 20bn and signal that it will likely extend purchases beyond September 2016.