Global weekly: A positive mood

News item -

According to the Federal Reserve minutes, the Fed kept its policy rate unchanged due to worries over emerging markets. The Fed’s decision, however, together with risen oil prices, brought markets in a positive mood.

Macro outlook
In September, the Federal Reserve (Fed) left its policy rate on hold, although markets had expected a rate hike. The Fed’s minutes show that risks in emerging markets, particularly in China, raised concerns on the effects that these developments would have for the US economy and the inflation outlook. The delay of the first rate hike will give the Fed time to allow financial conditions to stabilise, external uncertainties to wane and data to improve again.

We think that the Fed will further delay raising interest rates beyond December and into 2016. When exactly is uncertain, but our sense is that the first hike will not come until June 2016. After that, we expect a rate hike every other meeting, which would leave the target for the fed funds rate in a range of 0.75-1% in December 2016.

When the Fed does delay its December rate hike, this will lead to reactions from other central banks. We already expect the ECB to increase its monthly purchases from EUR 60 billion to EUR 80 billion. We now think that the ECB will also extend the time horizon for its asset purchasing programme through the end of 2016. Meanwhile, the Bank of Japan will likely step up its monetary easing early next year, but the chances of an earlier move are now much bigger. Finally, we are also pushing back our forecast for the first rate hike by the Bank of England to the third quarter of next year, from previously the first quarter.

Download the Global weekly to read more.