Fed to take a "formal" pause in 2016? - Rabobank

Analysts at Rabobank explained that in recent weeks encouraging data have reflated the Fed’s confidence. In fact, in coming weeks Fed speakers – most notably Esther George – are likely to stress that September is a live meeting.

Key Quotes:

"However, despite the rebound in employment growth and the resilience of financial markets after Brexit, a rate hike in September may be too early for many in the FOMC. It would certainly not be a unanimous decision, which would make a hike counterproductive. After all, how can the FOMC convince the markets that it is safe to hike when it can’t even convince everybody in the Committee? Many doves are still in a wait-and-see mode to assess the threats to the global outlook and the robustness of domestic momentum."

"The next meeting takes place on November 2. However, hiking for the first time in almost a year less than a week before Election Day (November 8) may be stretching the interpretation of central bank independence. Also note that this meeting does not have a press conference to explain the decision in more detail than a formal statement. What’s more, the outcome of the elections may in itself pose a risk to the Fed’s outlook for the economy. In fact, Brexit is likely to have elevated that risk in the minds of the FOMC participants, as the root causes may not be entirely unrelated.

If the US economy continues to grow despite the increased headwinds, slack in the labor market will diminish, and we expect the Fed to squeeze in one rate hike before the end of the year, most likely in December. After all, the Fed still likes to think that it is on a hiking path.

However, a December call also means that we think that the risk of the FOMC not hiking at all in 2016 is substantial. In fact, a few more negative surprises and the Fed may be forced to take a (formal) pause."