FINAL COUNTDOWN: Here's what 17 experts are predicting for Fed rate hikes
There is no consensus among economists regarding when the Federal Reserve will raise interest rates.
Some believe it'll happen on Thursday when the Fed concludes its next Federal Open Market Committee (FOMC) meeting. Some believe it'll happen in October. Other believe it'll happen in December. And then there's the very few who think we'll have to wait until 2016 to see a move.
One thing is clear: no one has a very high conviction or a particularly convincing case for their call.
The Fed brought its benchmark fed funds rate target to 0.00%-0.25% in December 2008 in its effort to stimulate growth and inflation in the wake of the global financial crisis.
The question now is if the economy is ready for higher rates.
We thumbed though the notes and compiled the predictions from 17 Wall Street firms. Below you'll find their calls and snippets from their research. We'll find out who is right and wrong on Thursday afternoon.
First of all, here's a look at the Fed's near-0% rate, which will soon come to an end.
UBS
Projected timing of rate hike: SEPTEMBER
On the timing: "September has three advantages. 1) It offers a compromise between hawks and doves, getting one rate hike "out of the way" without committing the Fed to more. 2) It provides optionality for those who anticipate that more than one hike this year would likely be appropriate (10 FOMC members, or the majority of the committee, as of June. Though likely there are now a few less). 3) It avoids any risks resulting from policy changes around year-end, when bank funding issues tend to become more complex," said economists Drew Matus, Samuel Coffin, and Maury Harris.
Reasons for call: "We continue to believe that, once the Fed moves, economic conditions could improve, prompting further moves by the Fed. At the same time, we believe that the fact that both unemployment and inflation tend to lag economic activity and to move in trend-
like fashion helps to explain why past Fed rate hike cycles have evolved as they have in the past."
like fashion helps to explain why past Fed rate hike cycles have evolved as they have in the past."
BANK OF AMERICA MERRILL LYNCH
Projected timing of rate hike: SEPTEMBER
On the timing: "The Fed doesn’t want to hike in the midst of a correction and exacerbate a selloff. At the same time, Fed officials know the dangers of being beholden to the markets. Thus, in our view, the FOMC will need to see signs of a significant disruption in financial markets to preclude a hike — which remains a risk. Conversely, a relative sense of calm should allow liftoff in September," said economist Michael Hanson.
Reasons for call: "Some market participants wonder whether the Fed is stuck in a catch-22: any indication it may hike generates an adverse market reaction that precludes an actual hike. They cite the recent jump in the VIX, which briefly put it more than two standard deviations above its long-run average level (Chart 3). But Fed officials have been warning for some time that they expect some greater volatility as markets come to grips with liftoff. Thus a modest sell-off alone is unlikely to stop the Fed."
OPPENHEIMER
Projected timing of rate hike: SEPTEMBER
On the timing:"This week it’s no surprise that all eyes will be focused on the Fed. 'To raise rates or not to raise rates'—that is the question—even ever so modestly. We think the Fed should raise its benchmark rate by 15 basis points," said Chief Investment Strategist John Stoltzfus.
Reasons for call: "We’ll stick to progress not perfection for now on the back of a US economy that may not be robust but is growing moderately and shows an ability to sustain growth."
WELLS FARGO
Projected timing of rate hike: SEPTEMBER
On the timing: "Although it is a close call, we still look for the FOMC to announce an increase in the fed funds rate next week. We expect a rate rise would be tempered, however, with a more dovish path for future rate hikes. The 'dot plot' could show that most members expect the fed funds target rate to remain at 25 bps-50 bps through the end of the year. Such a move would drive home the notion that the FOMC intends to move more gradually than in prior tightening cycles, but also make clear its focus is on the cumulative progress of the U.S. economy," said Wells Fargo Economists.
Reasons for call: " In our view, the labor market has clearly seen 'some' further improvement. The unemployment rate is now within the FOMC’s estimates of full employment. Although job growth slowed last month, hiring in prior months was revised up. In addition, the first print for August payrolls has frequently underestimated actual hiring, as noted by the FOMC in the meeting minutes from last September."
CITI
Projected timing of rate hike: SEPTEMBER
On the timing: "There seems to be enough evidence for the Fed to lift rates next week. Investors have been wondering about the beginning of a central bank rate hiking cycle for a while which implies that this sentiment is 'in the market' with almost every governor saying that it is time to 'normalize' interest rates," said strategist Tobias Levkovich.
Reasons for call: "The NFIB and Manpower hiring intentions surveys remain relatively supportive of more jobs and the unemployment rate has fallen alongside lower jobless claims while short-term unemployment rates are back down to prior lows. Job openings look respectable and a number of industries are highlighting worker shortages. Given this backdrop, a zero interest rate policy no longer seems appropriate."
BMO CAPITAL MARKETS
Projected timing of rate hike: SEPTEMBER
On the timing: "We lean slightly toward the FOMC lifting rates on Thursday, though the futures market is roughly 28% priced for a move. Arguments in favor of an increase include the hearty rebound in economic growth, continued decline in joblessness, and concern that too-loose policy could foment market imbalances. While inflation is low now, that’s largely due to temporary factors (lower oil, higher dollar), while wages are bound to pick up when the labor market returns to full employment in just over a year’s time, by our reckoning," said economist Douglas Porter.
Reasons for call: "Prior to the policy announcement, a data-dependent Fed will have a close eye on four key economic reports for August. We expect an even split, with retail sales and core CPI inflation moving higher, while industrial production and housing starts retreat."
JP MORGAN
Projected timing of rate hike: SEPTEMBER
On the timing: "Whether the FOMC raises rates at next week's meeting is a very close call – we view it as essentially a coin flip. The economic data present a clear case for the Fed to begin the normalization process next week. However, the recent financial market turbulence complicates the decision. We think in this environment the best policy is for the Fed to hike next week with communications that reinforce its message that it is the pace that matters, and the pace will likely be gradual and responsive to changing risks," said economist Michael Feroli.
Reasons for call: "A related argument for delaying next week is the low cost of waiting to learn a little more about the economy. This argument certainly has some intuitive appeal. However it does feel a bit like Zeno's paradox: no six-week period matters that much, but adding up trivial delays can put policy non-trivially behind the curve. Moreover, just as there is little cost to delaying a bit, it's arguable that not much is learned in six weeks either (certainly we won’t have a much better understanding of Chinese economic data in another six weeks). For all the sophisticated modeling of optimal policy, ultimately the assessment of risks is a highly subjective affair."
SOCIETE GENERALE
Projected timing of rate hike: SEPTEMBER
On the timing: "The long-awaited September FOMC meeting is finally upon us. Our baseline scenario is of a rate hike but only as the first move of a very gradual and limited tightening cycle . The dots are likely to show only one rate increase this year, implicitly suggesting a long pause after the first rate hike," said economists Aneta Markowska and Brian Jones.
Reasons for call: "Admittedly, wobbly financial conditions represent a significant risk to our view as the Fed may choose to wait until the fog lifts. However, if there is no hike, we wo uld expect the accompanying message to be hawkish, suggesting a strong possibility of an October lift-off. Bottom line: hike or no hike, do not expect a dovish outcome."
DEUTSCHE BANK
Projected timing of rate hike: OCTOBER
On the timing: "Assuming the majority of the aforementioned seven conditions are met, we expect an October rate hike to be followed by two more 25 basis-point (bp) increases at next year’s March 15-16 and June 14-15 FOMC meetings," said economist Joseph LaVorgna.
Reasons for call: "The difficult part for the Fed will be convincing the markets that the funds rate can go up next month. We do not believe the Fed can initiate an interest rate hike in December for a couple of reasons: One, the optics of raising interest rates in the middle of the holiday shopping season are not good. Additionally, the financial markets are notoriously illiquid at yearend. Hence, a rate hike could cause an outsized reaction in the financial markets."
TD BANK
Projected timing of rate hike: NOT SEPTEMBER, MAYBE OCTOBER
On the timing: "Our baseline scenario calls for the Fed to pass on a September rate hike but to emphasize data dependence, keeping the specter of rate hikes alive at the October meeting. This should keep front-end rates pinned higher, and we expect further selling on the front-end of the curve in this 'hawkish, no hike' scenario. This scenario is generally priced in, but we expect the odds of a October rate hike (currently at 45%) to increase if the Fed sounds hawkish in September," said economists Priya Misra, Gennadiy Goldberg, and Cheng Chen.
Reasons for call: "A Fed rate hike would also shift the market’s focus to the response of the effective fed funds rate. We believe the target Fed funds rate will be a range of 0.25% to 0.50%, with RRP at the lower end of the range and the IOER providing the upper bound. There remains considerable uncertainty about where effective Fed funds should trade in the wake of the first hike. Most market participants expect the range to be somewhere in the 30-38bps range, but we are converging on the 33-35bps area."
GOLDMAN SACHS
Projected timing of rate hike: DECEMBER
On the timing: "We adopted a December liftoff forecast following the June FOMC meeting, largely because this seemed to be Chair Yellen’s own baseline. Recent events have further strengthened our conviction that next week is too early for a rate hike," said economists Jan Hatzius and Zach Pandl.
Reasons for call: "Fed officials have made it clear that 'data dependent' policy refers not only to data releases but also to factors that could impinge on the outlook, including changes in financial conditions. Several FOMC participants have thus reacted to the tightening by hinting at changes in their economic forecast and/or shifting their tone on the risks."
NOMURA
Projected timing of rate hike: DECEMBER
On the timing: "We believe that the FOMC will wait until December to increase short-term interest rates. This judgment is primarily due to the uncertainty surrounding the inflation outlook and the evolution of financial conditions going forward," said economists Lewis Alexander, Aichi Amemiya, Joseph Song and Roiana Reid.
Reasons for call: "The possible impact of recent financial market movements on the economy is not yet clear, but should become clearer by the December FOMC meeting. That said, a September liftoff is still on the table as economic data have been more solid and some FOMC participants still seem confident that inflation will evolve in line with their outlook."
CREDIT SUISSE
Projected timing of rate hike: DECEMBER
On the timing: "Assuming the FOMC stays on hold next week, we expect one rate increase by year-end, with the choice of October or December dictated in part by the tone of the financial markets. We are forecasting a December 16 lift-off, although if markets stabilize in short order and the data continue to cooperate, the October 28 meeting may prove to be a more compelling entry point," said Credit Suisse economists.
Reasons for call: "If domestic data alone were the issue, we'd be inclined to expect lift-off in September. Payrolls are trending at a stalwart three-month average +221K clip. Nominal labor income is growing at a 5% annual pace, and August's 5.1% unemployment rate sits within the FOMC’s “longer run” zone of 5.0%-5.2%. The icing on the cake – job openings reported this week showed a dramatic surge. But the timing of the initial tightening has become largely contingent on global conditions and financial market volatility."
MORGAN STANLEY
Projected timing of rate hike: DECEMBER
On the timing: "Do it already. That is a comment we have heard often from clients. The uncertainty of being in a perpetual limbo of 'will they or won't they' has weighed heavily on the ability and willingness to plan ahead. The uncertainty of what will happen in global financial markets when the Fed does choose to lift rates for the first time in more than nine years is no better. But a growing list of investors are willing to take that chance. We maintain our expectation the Fed gets it done in December," said economists Ellen Zentner, Ted Wieseman, Paul Campbell Roberts, and Robert Rosener.
Reasons for call: "We are encouraged by a Fed that continues to stick with the message of an intent to raise rates this year, but they won't do it bull-headedly. The data must inform them that the time is right, and they've been bending to the data as much as possible throughout the year. Now, the last hurdle is simply perceiving the downside risks to inflation have receded."
BNP PARIBAS
Projected timing of rate hike: DECEMBER
On the timing: "While our base case remains for a December rate hike, the risks to a later first hike have increased, given wobbly stock markets, a less favorable outlook for domestic corporate profits and equity valuations, a weaker global growth backdrop, and the potential for a larger (or longer) divergence in global monetary policies, which causes more tightening to come through exchange rate appreciation. Communication out of the 17 September FOMC meeting will likely support this assessment," said economist Michael Hanson.
Reasons for call: "Hiring slowed a bit in August, but the unemployment rate fell to its lowest level since 2008. H1 growth was revised up. Despite this resiliency, at least some of the external risks the doves were previously worried about have become real. The manufacturing sector ISM has fallen to its lowest level since May 2013, and manufacturers continued to shed jobs, raising questions as to whether a foreign-induced slowdown will spread."
HSBC
Projected timing of rate hike: DECEMBER
On the timing: "Our base case is that the FOMC will delay tightening until December, rather than after its 16-17 September meeting. Though progress has been made on the labor market side of the Federal Reserve’s dual mandate, inflation continues to fall below the FOMC’s 2.0% target. More broadly, uncertainty about the outlook for economic growth and inflation has increased substantially since the last FOMC meeting in July amid continued USD appreciation and the further fall in commodity prices," said economists Kevin Logan and Ryan Wang.
Reasons for call: "However, the drop in the unemployment rate has not been accompanied by any discernible upward pressure on inflation. Average hourly earnings for the past three months have increased at roughly the same 2.2% annualized rate as they have for the past three years. The measured rate of core PCE inflation has fallen to 1.2%, down from 1.7% a year ago. The headline rate of inflation is much lower, at 0.3%, and is likely to remain below 1.0% through the end of this year."
BARCLAYS
Projected timing of rate hike: MARCH
On the timing: "Recent financial market turmoil, lower oil prices, and downward pressure on the inflation outlook from weak international demand and renewed strength in the trade-weighted dollar all pose downside risks to the domestic outlook. We expect the FOMC will proceed cautiously against this backdrop and delay liftoff until March 2016," said Barclays economists.
Reasons for call: "Although we do not see the current situation as similar to years past, when the global recovery was on shakier ground and unconventional monetary policy had not yet become conventional, the link between heightened uncertainty and business caution is fairly well-established. In addition, our updated inflation profile points to a slower recovery from the base effects of previous dollar appreciation and energy price declines. We now do not foresee y/y rates of CPI inflation exceeding 1.0% until January 2016. Hence, we believe a delay is justifiable given that policy is data-dependent."
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