U.S Rates Set To Remain On Hold Until 2016.

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Fed kept rates unchanged one more time Central Bank actions continue to dominate last week’s economic headlines. Unsurprisingly, the FOMC kept its rate unchanged at 0.25%, citing that policy tightening will be appropriate if the Fed’s dual mandate (promoting maximum employment and achieving price stability) improves. The Fed is expecting inflation to remain low in the near term but continues to stay optimistic that the 2% target can be achieved in the medium term. The central bank’s inaction at the FOMC meeting was, in any case, not a surprise and we maintain our view that no rate hike will happen in 2015. Yet, it has been several months since the Fed announced the end of the zero interest-rate policy. Slowdown in the global economy, and in particular in China, have, according to Fed officials, prevented the first rate hike, which would have been the first one in almost a decade. Janet Yellen declared that she is still awaiting confirmation of U.S. recovery before making any move. The Fed is trying to keep its credibility for future manoeuvres.
China threatens U.S. inflation From our vantage point, we believe that no rate hike will happen this year as recent U.S. economic data came in mixed. The Fed’s dual mandate to promote maximum sustainable employment and inflation target of 2% is for the time being actually failing in its mission. Indeed the dollar-complex has constantly strengthened since the beginning of the year. The deflation pressures are not likely to stop. China is the country with the largest U.S deficit. As China debased its currency three times in August, the trade deficit with China is likely to widen even more. As a result, U.S. inflation will remain low.
What’s next? However, the market is now pricing out, after last week’s Fed meeting, a rate hike in December. Yet, we believe that Janet Yellen, in an effort to keep her credibility, only left hopes in such an issue. In addition, her hesitancy to act, to increase rates by a quarter point has sent completely the wrong signal. It is leading us to now properly wonder whether the U.S. economy is actually in a worse state than we have been led to believe. In the foreign exchange markets, EURUSD lost more than a figure before bouncing back at 1.0900 on new hopes for a rate hike this year. Nonetheless, the short-term structure still indicates a negative bias. We think that markets were expecting a proper time frame for a rate hike and interpreted Fed statements in this sense. If there is effectively no rate hike this year then the true state of the U.S economy will really be brought into question.
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