Pantheon macroeconomics cuts Fed rate hike forecasts for 2016

The US central bank was set to continue tightening policy in 2016 and 2017, analysts at Pantheon Macroeconomics said, even as it took an axe to its very short-term forecasts for further Fed action.

Part of their rationale lay in the extreme worry among US authorities that Britons might vote to exit the European Union when they vote in referendum on 23 June.

"We have to recognize that a June hike is now less likely, not least because the U.K.’s referendum on its membership in the European Union comes just eight days after the FOMC meeting. The intervention of President Obama in London on Friday and the open letter by eight former U.S. Treasury Secretaries urging Britons to stay in the EU makes it very clear that the administration is extremely nervous of the potential consequences of Brexit," they said in a research note sent to clients.

"US administration is extremely nervous of the potential consequences of Brexit"

Blinding glimpse of the obvious needed

Only if the domestic evidence for action was exceptionally strong and it became blindingly obvious the UK would opt to remain in the EU would Dr.Yellen, the Fed chair, risk moving only a week before chaos might descend on global markets.

Thus, the think-tank's revised forecasts now called for two additional 25 basis point rate hikes from the Federal Reserve, in September and December, to end the year at 0.875%.

However, by self-admission they remained more aggressive than other Fed-watchers, forecasting further 25bp hikes in March, April and June of 2017 and followed by 50bp hikes in September and December, to finish at 2.625%. That is more than 1.875% which the Federal Open Mart Committee itself is expecting, where as financial markets were discounting rates would lie at just 0.8%.

By waiting until September, rate-setters in Washington DC would also have a better idea of what transpired in the US economy in the second quarter and how the outlook was shaping up for the following quarter.

Nonetheless, Pantheon Macroeconomics was relatively-bullish on second quarter gross domestic product growth, anticipating the economy would expand at a 3.5% clip.

Seasonal factors impacting first quarter growth would wash out and foreign trade and inventories would present much smaller drags, it predicted.