Thursday 16 June 2016 by Opinion

US Fed signals patience again in 2016

In line with our expectations, the US Federal Reserve Chair Janet Yellen spoke of deliberations of the Fed this week


Her comments suggested that they are less committed to the two increases previously suggested, and that one to two more increases is the likely range. 

She cited labour market weakness and inflation as concerns, while mentioning that brexit weighed on their decision and could have consequences for the US. 

US 10 year bond yields fell again upon the announcement of the Fed holding rates this month, but the fall was more about these comments than the outlook for the rest of the year.

Our view remains unchanged; the Fed will increase rates once more this year – likely in December – and probably only once in 2017.  Global economic weakness will prevent them from increasing rates any faster as they would risk pushing the USD even higher, thereby hurting export competitiveness.  As for labour market concerns, we believe that much of this weakness relates to uncertainty created by the election, and the closer the contest, the more that businesses will hold off with hiring decisions.  Such impacts tend to be temporary, easing once the election decision and the policy direction of the new government becomes clear, that is, early 2017. 

This has implications for markets – the US’ 10 year yields, below 1.6%pa, are at the lower limits of fair value.  On the other hand the AUD:USD jump to over 74c is an overreaction, and doesn’t consider the high likelihood of weakness in Australian inflation and the interest rate environment over the next few years.