Analysis Overview – The Fed is likely to cut interest rates in 2016 and this article discusses the factors for this view and the investment strategy in the current scenario.
The Big Slump – When the fed increased rates in December 2015, there were economists talking about at least four rate increases in 2016. However, global economic activity has weakened so significantly that a rate cut is likely instead of rate hike.
No Doubt On Economic Activity Weakness – The GDPNow indicator reading as of March 28, 2016 estimates 1Q16 GDP growth of just 0.6% for the United States. The composite global PMI for February 2016 stands at 50.6 with the PMI slumping in the last two months. China’s non-manufacturing PMI has declined from 54.4 to 52.7 in the last two months with manufacturing PMI at 49.0. All these data clearly indicate that the global economy has witnessed sharp deceleration in growth.
What Is Yellen Saying – The following statements by Yellen on the global economy and the US economy puts things into perspective. I judge the tone as cautiously optimistic, but I am of the view that US economic activity is weaker than reflected in Yellen’s comments.
Readings on the U.S. economy since the turn of the year have been somewhat mixed… In particular, foreign economic growth now seems likely to be weaker this year than previously expected, and earnings expectations have declined. By themselves, these developments would tend to restrain U.S. economic activity…All told; the Committee continues to expect moderate economic growth over the medium term accompanied by further labour market improvement…
The Most Important Comment – “If economic conditions were to strengthen considerably more than currently expected, the FOMC could readily raise its target range for the federal funds rate to stabilize the economy. By contrast, if the expansion was to falter or if inflation was to remain stubbornly low, the FOMC would be able to provide only a modest degree of additional stimulus by cutting the federal funds rate back to near zero.“
