Unfortunate, not to see rate hike from the Fed – Deutsche Bank

FXStreet (Delhi) – David Folkerts-Landau, chief economist at Deutsche Bank, suggests that its unfortunate that the Fed let recent bouts of volatility in global markets and concerns about growth abroad – especially in emerging market economies and China – stay its hand. The beginning of the policy normalisation process now would have been absolutely appropriate and frankly long overdue.

Key Quotes

“US growth remains on solid footing, the labour market is at full employment and inflation, although low, should rise towards the Fed’s target of two percent. Current economic conditions are consistent with monetary policy nearer to neutral, that is, a fed funds rate between 2 and 3 percent and a balance sheet without excess reserves, not the crisis-mode policy that has prevailed to date, with near zero rates and an inflated Fed balance sheet! Maintaining this policy risks exacerbating financial stability and a surge in inflation down the road.”

“Although the Fed did not hike, their message on the economy was upbeat: economic activity remains solid, the labour market continues to tighten, and inflation is expected to rise over the next few years. I agree with this constructive assessment and do not infer any negative signals about the US outlook from today’s decision to not raise rates.”

“I see the Fed raising rates later this year. Improving macro data in the US and China in the coming weeks and months will ease global growth concerns and help stabilise financial markets. This in turn will lead investors to come to expect (and price) a hike, as Fed officials use speeches, interviews and other opportunities to signal that rate rises are coming. This will remove one of the obstacles that contributed to keeping the Fed on hold this time around: that the market was only pricing a one third chance of a rate rise.”