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10 Apr 2015
June hike remains a possibility, but risks of a pushback exist – ING
FXStreet (Barcelona) - Rob Carnell, Chief International Economist at ING, comments on the USD’s impact on inflation and US growth, and further mentions that the Fed will likely take into consideration the dollar strength and its tightening impact on the economy while setting policy.
Key Quotes
“One way the dollar can affect the Fed’s decision is through inflation, with a stronger dollar leading to decreased import prices, passing through into weaker producer prices, and eventually spilling over into consumer prices and lower inflation.”
“…the feed through from the dollar to CPI inflation is fairly small, and for the 10% real appreciation the dollar has experienced so far, we would anticipate the CPI inflation effect to be worth only about 1ppt.”
“There have been much bigger currency swings in the past that have had apparently smaller impacts on headline inflation than are apparent this time.”
“And of course, the key driver for inflation currently is energy prices, which show signs of having troughed, which strongly suggests that inflation will shortly begin to move back towards the higher core rate.”
“The other key consideration for the US is growth. The short answer is that one cannot make any generalisations here. The growth impact depends critically on the cause of the dollar strength.”
“Nevertheless, it does seem reasonable that the Fed will take the USD into account when setting policy. A stronger currency ought to be considered a type of monetary tightening. And if the Fed conducted monetary policy by thinking in terms of overall monetary conditions (which before forward guidance used to be the fashion in some central bank circles) then it probably would.”
“In short, the June rate hike call still hangs in the balance, and if pushed back, our bond yield forecasts, already under downward pressure from Eurozone backwash, will likely be nudged lower too.”
Key Quotes
“One way the dollar can affect the Fed’s decision is through inflation, with a stronger dollar leading to decreased import prices, passing through into weaker producer prices, and eventually spilling over into consumer prices and lower inflation.”
“…the feed through from the dollar to CPI inflation is fairly small, and for the 10% real appreciation the dollar has experienced so far, we would anticipate the CPI inflation effect to be worth only about 1ppt.”
“There have been much bigger currency swings in the past that have had apparently smaller impacts on headline inflation than are apparent this time.”
“And of course, the key driver for inflation currently is energy prices, which show signs of having troughed, which strongly suggests that inflation will shortly begin to move back towards the higher core rate.”
“The other key consideration for the US is growth. The short answer is that one cannot make any generalisations here. The growth impact depends critically on the cause of the dollar strength.”
“Nevertheless, it does seem reasonable that the Fed will take the USD into account when setting policy. A stronger currency ought to be considered a type of monetary tightening. And if the Fed conducted monetary policy by thinking in terms of overall monetary conditions (which before forward guidance used to be the fashion in some central bank circles) then it probably would.”
“In short, the June rate hike call still hangs in the balance, and if pushed back, our bond yield forecasts, already under downward pressure from Eurozone backwash, will likely be nudged lower too.”