What Could Delay Monetary Policy Normalization in the US?
Is a 2015 Rate Hike Imminent in the US?
July FOMC meeting
The FOMC (Federal Open Market Committee) will meet on July 28–29, 2015. The monetary policy statement may give some idea about how policymakers are reading economic conditions. It could contain hints about the path of monetary policy normalization.
The Fed has reiterated time and again that it remains data dependent as far as assessing the readiness of the economy for a rate hike. However, there are factors that can negatively impact economic indicators. This impacts the timing of the rate hike.
Non-energy import prices
A fall in non-energy import prices has been responsible for suppressing core inflation in the past few months. Although policymakers are considering it to be transitory, a trend contrary to this expectation would suppress inflation more. It wouldn’t be favorable for an expected rate hike.
Strong dollar
The strong dollar (UUP) has already led to companies like Groupon (GRPN), Pfizer (PFE), and Omnicom Group (OMC) warning investors about a hit on revenue in 2015. The dollar generally rises with the expectation of a rate hike.
Not only will a strong dollar hit exporters’ revenue overseas, it will also hurt economic growth because exports will fall. This will have a bearing on the timing of a rate hike.
Low consumer spending
A healthy rise in consumer spending is crucial for the US economy. It forms about two-third of the nation’s economic output. Policymakers are hoping that the tepid rise in consumer spending will reverse as 2015 unfolds. However, if consumers prefer to keep their savings, the economic output will reduce. This could delay a rate hike.
A fall in oil prices
An oil price rebound (USO) has been welcomed by several market participants, apart from oil companies. However, with sanctions on Iran being lifted and other major oil producers continuing to pump oil, the possibility of a fall in crude oil prices from their present level has emerged.
This will likely hurt inflation. You’re already aware of the negative impact that the fall in crude oil prices has had on inflation since mid-2014 until early this year.
International developments
Adverse developments in Greece and the Chinese stock market were prominent features in the FOMC meeting minutes for June 2015.
For now, the situation in Greece has stabilized and so have Chinese stocks. However, if these or any other nations face a crisis, the Fed would be forced to adopt a “wait-and-see” approach towards domestic monetary policy.
Currently, a rate hike in the US isn’t imminent. The Fed meets next week. You can visit Market Realist’s Macro ETF Analysis page to stay updated on the decision that policymakers make.
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