The Federal
Reserve’s plan to raise interest rates this year, forged over months of
strong jobs growth and a seemingly durable expansion, now faces an
economy that no longer follows the script and may push the “liftoff” far
into the future.
The world's largest economy slowed to a crawl in the first quarter and may actually have contracted.
That was initially dismissed as a winter lull, but recent data may point to a more substantial
slowdown just as the Fed plots its exit from a zero interest rate policy maintained since Dec. 2008.
Lackluster retail sales and investment, sagging consumer confidence, a ballooning trade deficit and stagnant industrial output have all cast doubt over the central bank's plans.
"The Fed has been telling us for some time that they want to be data dependent, and the numbers are nothing to run up the flagpole," said Conference Board economist Kenneth Goldstein.
The Conference Board is one of three organizations in a Reuters poll of economists that see liftoff in 2016, compared to 50 of 62 that expect the first rate rise in the third quarter of this year.
For traders, the weakened 2015 has complicated any guess at the Fed's direction. Treasury yields will probably fall if it becomes clear the central bank has to once again delay its plans, but that raises the risk of steeper and faster rate hikes down the road.
“The penance for a delay of the hike is a much steeper hike...That’s the balance the market’s been playing with," said Aaron Kohli, an interest rate strategist with BNP Paribas in New York. "The longer the Fed stays on hold, the more risk there is that factors like inflation will build up."
That was initially dismissed as a winter lull, but recent data may point to a more substantial
slowdown just as the Fed plots its exit from a zero interest rate policy maintained since Dec. 2008.
Lackluster retail sales and investment, sagging consumer confidence, a ballooning trade deficit and stagnant industrial output have all cast doubt over the central bank's plans.
"The Fed has been telling us for some time that they want to be data dependent, and the numbers are nothing to run up the flagpole," said Conference Board economist Kenneth Goldstein.
The Conference Board is one of three organizations in a Reuters poll of economists that see liftoff in 2016, compared to 50 of 62 that expect the first rate rise in the third quarter of this year.
For traders, the weakened 2015 has complicated any guess at the Fed's direction. Treasury yields will probably fall if it becomes clear the central bank has to once again delay its plans, but that raises the risk of steeper and faster rate hikes down the road.
“The penance for a delay of the hike is a much steeper hike...That’s the balance the market’s been playing with," said Aaron Kohli, an interest rate strategist with BNP Paribas in New York. "The longer the Fed stays on hold, the more risk there is that factors like inflation will build up."
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