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The IMF turns “dovish”

Last week, the market’s attention was focused on the European Central Bank’s meeting, Greece’s negotiations with creditors and key report on the US labor market. Amid these important events, market players didn’t notice the publication of an annual report on the US economy from the experts of the International Monetary Fund.

And yet, I believe, that this document is worth paying attention to. And not even because the IMF lowered its forecast for US GDP growth this year from 3.1% to 2.5% in this report. Such scenario was quite possible and correction to the downside was expected.

The thing is that expectations of the US economic growth above 3% in 2015 were observed a year ago, but almost disappeared in winter. Last year in May, the OECD forecast promised the States GDP growth at 3.5% in 2015, but in the end, the Fed’s comments sounded more modest, anticipating 2.5% to 3.0%. The Wall Street Journal economic provided a consensus projection of real GDP for 2015 at 2.9%.

However, there were even more pessimistic assessments then. Soon after the New Year Richmond Fed president Jeffrey Lacker warned that this year the world’s largest economy may grow by only 2.25%. And in March, the official Fed’s forecast provided estimate close to that of Lacker’s, expecting the average GDP increase at the level of 2.5% in 2015.

Only the IMF continued to expect from the US acceleration above three percent. In April, after the Fed lowered its GDP forecasts, the IMF announced that it expected the US GDP growth at 3.1% this year. In the light of weak data for the first quarter this forecast seemed too optimistic, so one could only wait when it would be adjusted. Well, now the wait is over…

In its new report the IMF is calling for the US central bank to postpone the interest rate hike until the first half of 2016. Justifying its “dovish” song, the Fund’s analysts point to a number of factors:

  • the US labor market is not strong enough yet;
  • strong dollar hampers economic recovery;
  • wage growth is too slow in the US;
  • the outlook for inflation remains uncertain.

Given all this, the IMF recommended that the US monetary authorities wait for more “tangible signs” for wage growth and inflation acceleration and to postpone the launch of the tightening cycle until the next year – or to its first half.

Will the Fed follow this advice? Probably yes. But this is due not so much because of its attention to the IMF advice, but to the central bank’s own considerations. The thing is that the Fed, even before the IMP advice, decided to wait for signs of inflation moving to the 2% target level in March, before raising rates. Therefore, if inflation doesn’t begin to approach the level of two percent this year, the Fed will not raise rates even if the IMF is calling for it. But on the other hand, if the price growth in the US significantly accelerates in the second half of the year, and this trend manifests itself on the salary level and the labor market shows clear signs of progress, I think, that the Federal Reserve will have no reason to delay the rate increase until 2016 .

So, now we can only wait and monitor the statistics. It seems that the inflation situation in the US is not developing in favor of raising rates. In April, the Fed’s core inflation index – the basic price index for personal consumption expenditures (Core PCE) – grew by only 1.2% on an annual basis.

 

Dear traders, please post your comments to our forecasts and share your own opinion. Your ideas can be very helpful for the newcomers in the forex market. Thank you!

Last week, the market’s attention was focused on the European Central Bank’s meeting, Greece’s negotiations with creditors and key report on the US labor market. Amid these important events, market players didn’t notice the publication of an annual report on the US economy from the experts of the International Monetary Fund.

And yet, I believe, that this document is worth paying attention to. And not even because the IMF lowered its forecast for US GDP growth this year from 3.1% to 2.5% in this report. Such scenario was quite possible and correction to the downside was expected.

The thing is that expectations of the US economic growth above 3% in 2015 were observed a year ago, but almost disappeared in winter. Last year in May, the OECD forecast promised the States GDP growth at 3.5% in 2015, but in the end, the Fed’s comments sounded more modest, anticipating 2.5% to 3.0%. The Wall Street Journal economic provided a consensus projection of real GDP for 2015 at 2.9%.

However, there were even more pessimistic assessments then. Soon after the New Year Richmond Fed president Jeffrey Lacker warned that this year the world’s largest economy may grow by only 2.25%. And in March, the official Fed’s forecast provided estimate close to that of Lacker’s, expecting the average GDP increase at the level of 2.5% in 2015.

Only the IMF continued to expect from the US acceleration above three percent. In April, after the Fed lowered its GDP forecasts, the IMF announced that it expected the US GDP growth at 3.1% this year. In the light of weak data for the first quarter this forecast seemed too optimistic, so one could only wait when it would be adjusted. Well, now the wait is over…

In its new report the IMF is calling for the US central bank to postpone the interest rate hike until the first half of 2016. Justifying its “dovish” song, the Fund’s analysts point to a number of factors:

  • the US labor market is not strong enough yet;
  • strong dollar hampers economic recovery;
  • wage growth is too slow in the US;
  • the outlook for inflation remains uncertain.

Given all this, the IMF recommended that the US monetary authorities wait for more “tangible signs” for wage growth and inflation acceleration and to postpone the launch of the tightening cycle until the next year – or to its first half.

Will the Fed follow this advice? Probably yes. But this is due not so much because of its attention to the IMF advice, but to the central bank’s own considerations. The thing is that the Fed, even before the IMP advice, decided to wait for signs of inflation moving to the 2% target level in March, before raising rates. Therefore, if inflation doesn’t begin to approach the level of two percent this year, the Fed will not raise rates even if the IMF is calling for it. But on the other hand, if the price growth in the US significantly accelerates in the second half of the year, and this trend manifests itself on the salary level and the labor market shows clear signs of progress, I think, that the Federal Reserve will have no reason to delay the rate increase until 2016 .

So, now we can only wait and monitor the statistics. It seems that the inflation situation in the US is not developing in favor of raising rates. In April, the Fed’s core inflation index – the basic price index for personal consumption expenditures (Core PCE) – grew by only 1.2% on an annual basis.

 

Dear traders, please post your comments to our forecasts and share your own opinion. Your ideas can be very helpful for the newcomers in the forex market. Thank you!



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