Fed unlikely to hike rates until 2017 post Brexit, says ING
As global financial markets tank and the trade-weighted dollar appreciates sharply post Brexit, the chances of the Federal Reserve hiking interest rates this year are slipping away, ING said on Friday.
The bank pointed out that its view on the timing of the next Fed rate rise had always been contingent on a Remain vote, as financial market stability was one of the three conditions for the US central bank to hike.
“We believe US financial market tightness will increase significantly following the UK’s Leave vote, irrespective of what is happening elsewhere in the US economy.”
“Moreover, although the uncertainty of the UK’s EU membership vote is now behind us, the uncertainty of how this will proceed is now a real issue. Messy politics in the UK, and an uncertain reaction from the EU in terms of how to treat a departing member, all make for a period of heightened risk aversion.”
It added that with the USD trade-weighted index set to strengthen over the next few weeks and months, US financial tightness will increase, further undermining the argument for a rate hike.
The other factors influencing the Fed’s decision on interest rates are labour market/economic activity strength and inflation. ING argued that while these could be strong enough to override any financial market strength, this was highly unlikely.
“For one thing, a stronger USD will likely have a knock-on effect in terms of economic activity, with the manufacturing/export sector likely to see recent improvements curtailed. Furthermore, lower import prices following dollar strength will weigh on headline inflation, and we may also see dollar-based commodity prices slip again on any dollar gains, undermining the prospect of a base-effect-led increase in headline inflation rates.”
The bank said even a December rate hike looks like a long shot now, with any further tightening unlikely until 2017.