The Federal Reserve is unlikely to hike its policy rate from 0.25-0.50% at its 16th March 2016 meeting and may have little choice but to revise down its expectations to around 3 hikes for 2016 in its accompanying projections. In the 16th December “dot-chart”, the median expectation among the 10 voting Federal Open Market Committee (FOMC) members and 7 non-voting members was for four hikes this year (the weighted average was for a slightly less hawkish 91bp of hikes).

1. 1
Fed: This is what it sounds like when doves cry
Too many dark spots for a March hike…
The Federal Reserve is unlikely to hike its policy rate from 0.25-0.50% at its 16th
March 2016 meeting and
may have little choice but to revise down its expectations to around 3 hikes for 2016 in its accompanying
projections. In the 16th
December “dot-chart”, the median expectation among the 10 voting Federal Open
Market Committee (FOMC) members and 7 non-voting members was for four hikes this year (the weighted
average was for a slightly less hawkish 91bp of hikes).
This would imply a hike every other meeting, most likely faster than the “gradual” approach Chairperson
Yellen and other members have systematically referred to and too hawkish relative to the latest domestic
and global macro data and market prices summarized in Figure 1. Specifically, US GDP growth halved in
Q4, with negative contributions from domestic investment, an inventory drawdown and net exports. Growth
in the service sector has also slowed while a strong US dollar, weak global demand and capital spending
cuts in the oil sector are weighing on the manufacturing sector (12% of the U.S. economy). Oil prices
remain depressed and the dollar is still strong by historical standards.
Globally, real GDP growth slowed to around 2.8% yoy in Q4 2015 and likely slowed further in Q1 2016,
dragged lower by contracting trade, particularly from China with exports and imports collapsing 25% yoy
and 14% yoy, respectively, in February. Finally, while US and global equities have rallied in recent weeks,
they are still down since the December meeting.
The Fed and markets are thus likely to remain sensitive to particularly weak numbers, with US inflation and
retail sales numbers for January and Chinese inflation, investment, industrial output and retail sales data
due for release between now and 16th
March (see Figure 2).
…But Fed could start preparing market for a June hike
However, the nuanced picture painted in Figure 1 could encourage the Fed next week to issue a statement
which prepares the ground for mid-year hike, by referring to the following key trends:
i. The US labour market remains robust, with the unemployment rate below 5% for the second
consecutive month and participation rate ticking up to a 12-month high in February.
ii. Growth in earnings, wages and income has remained robust, as has credit growth, which should
support retail sales and personal consumption.
iii. House prices have gathered steam, rising 5.2% yoy in Q4 2015.
iv. The dollar TWI is down 3.5% from its mid-January peak and trading below mid-December levels
(see Figure 3). It’s noteworthy that the dollar had appreciated in the run-up to the December hike.
v. Crude oil prices are up about 42% from their multi-year low recorded on 20 January.
vi. Consumer and producer price inflation, as well as inflation expectations, have steadily risen.
vii. US and global equities are up about 8.4 and 8.8%, respectively, from their year-to-date lows
recorded on 11 February.

2. 2
Figure 1: US and global macro heat-map paints a nuanced picture
Source: US Bureau of Economic Analysis, US Bureau of Labor Statistics, United States Census Bureau, Federal Reserve
Bank of St Louis, IMF, investing.com, Markit/JP Morgan, MSCI, S&P/Case-Shiller
Variable Unit 3-month average prior
16 Dec Fed meeting
Average, past 3
months
GDP 3m/3m SAAR1
2.0 (Q3 final) 1.0 (Q4 2nd estimate)
Labor productivity2
3m/3m SAAR 2.0 -2.2
Global GDP growth3
% year-on-year 3.0 2.8
Global manufacturing PMI Index, seasonally adjusted 51.0 50.5
Global manufacturing PMI Index, seasonally adjusted 51.2 (November 2015) 50.0 (February 2016)
Global services PMI Index, seasonally adjusted 53.6 52.2
Global services PMI Index, seasonally adjusted 53.9 (November 2015) 50.7 (February 2016)
CPI-inflation % year-on-year 0.1 0.9
Core CPI-inflation % year-on-year 1.9 2.1
PCE4
price index % year-on-year 0.2 0.8
Core PCE price index % year-on-year 1.3 1.5
Market-based PCE price index % year-on-year 0.0 0.6
Core Market-based PCE price index% year-on-year 1.1 1.4
PPI-inflation % year-on-year -1.2 -0.8
5-year breakeven inflation rate % 1.21 1.18
Crude oil Brent, US dollars per barrel 46.5 34.7
House prices (Case-Shiller) % year-on-year 4.6 5.2
Total5
% year-on-year 6.9 6.6
Revolving % year-on-year 7.8 7.1
Non-revolving % year-on-year 4.4 5.2
Personal income Current prices, % year-on-year 4.4 4.1
Personal income Current prices, 3m/3m SAAR 3.5 3.6
Personal disposable income Current prices, % year-on-year 3.8 3.7
Personal disposable income Current prices, 3m/3m SAAR 3.6 3.2
Wages & salaries Current prices, % year-on-year 4.5 4.2
Wages & salaries Current prices, 3m/3m SAAR 3.2 4.9
Private nonfarm hourly earnings Current prices, % year-on-year 2.4 2.5
Private nonfarm weekly earnings Current prices, % year-on-year 2.3 2.2
Unemployment rate % of labour force, SA6
5.0 4.9
Participation rate %, SA6
62.5 62.7
Nonfarm payrolls Thousands, SA6
241.3 228.3
PCE Current prices, % year-on-year 3.2 3.5
PCE Current prices, 3m/3m SAAR 3.1 3.0
Retail sales Current prices, % year-on-year 1.9 2.5
Retail sales Current prices, 3m/3m SAAR 1.8 1.9
Industrial output % year-on-year 0.9 -1.2
Industrial output 3m/3m SAAR 2.0 -3.9
Manufacturing ISM Index 49.3 48.6
Non-manufacturing ISM Index 57.2 54.2
Durable goods orders % year-on-year -1.8 0.7
Durable goods orders 3m/3m SAAR -0.2 -2.1
Core capital goods orders7
% year-on-year -4.4 -4.1
Core capital goods orders 3m/3m SAAR 3.3 -6.6
US Dollar Trade weighted index8
121.4 125.2
US Dollar % change on previous 3 months 2.3 3.3
US Dow Jones Index 17284 16703
US Dow Jones % change on previous 3 months -0.3 -2.8
MSCI World Equity Index 402.0 379.2
MSCI World Equity % change on previous 3 months -3.3 -5.5
PricesGrowthIndustry&ServicesInflation
Income,wagesand
earnings
Labour
market
ConsumptionCredit
Currency&
equities

3. 3
Note: 1. Seasonally-adjusted annualized rate; 2. Nonfarm business sector; 3. Estimate using IMF methodology; 4.
Personal Consumption Expenditure; 5. Outstanding consumer credit; 6. Seasonally-adjusted; 7. Non-defense capital
goods orders excluding aircrafts; 8. My estimate,23 April = 100
Figure 2: Key data and events ahead of March and June Fed policy meetings
Source: BBC, ECB, Federal Reserve,investing.com
The possibility of a not-so-dovish Fed statement is seemingly not fully priced in, with the Fed funds market
still only pricing 2-3bp of hikes next week (or a 10% probability of a 25bp hike) and 28bp of hikes for the
full-year (one hike and a 12% probability of another full hike).
Figure 3: US dollar has weakened below pre 16th
December levels
Figure 4: Euro has lost steam but still probably
too strong for eurozone’s comfort
Source: investing.com Source: investing.com
95
100
105
110
115
120
125
130
135
Apr 12 Mar 13 Feb 14 Jan 15 Dec 15
USD trade weighted index (23 April 2010 = 100)
16 Dec
Fed hiike
75
80
85
90
95
100
105
110
115
Apr 10 Jun 11 Aug 12 Oct 13 Dec 14 Feb 16
Euro NEER
EURUSD
Euro indices (23 April 2010 = 100)
10-Mar China February CPI and PPI
10-Mar ECB policy meeting
12-Mar China January investment, industrial output
and retail sales
13-Mar German state elections
15-Mar US February retail sales and PPI inflation
16-Mar US February CPI
16-Mar US FOMC meeting
21-Apr ECB policy meeting
27-Apr US FOMC meeting
28-Apr US Q1 2016 GDP (advance estimate)
02-Jun OPEC meeting
02-Jun ECB policy meeting
15-Jun US FOMC meeting
23-Jun UK EU referendum

4. 4
European Central Bank monetary easing at its 10th
March policy meeting could, somewhat counter-
intuitively, ease the Fed’s job of presenting a more bullish/hawkish outlook. A 10bp cut in the deposit rate to
-0.4% and step up in the ECB’s QE program would, even if marginally, further support growth in the
eurozone – which absorbs about 17% of US merchandise exports.
Furthermore, to the extent that the market is already pricing further ECB easing, EUR/USD is likely to
remain near its one-year level of around 1.10. In any case the Fed would likely take in its stride modest
euro depreciation in the wake of the meeting. The euro TWI, despite its recent weakening, is still nearly 2%
stronger than three months ago and currency competitiveness is key for the eurozone’ open economies
(see Figure 4).
Looking further ahead
My core scenario remains for two 25bp hikes this year, which would help put a floor under the US dollar
(see What if the Fed hikes, leaves rates on hold…or cuts, 29 January 2016). But FOMC members will likely
want to see a recovery – or at least stability – in the following variables in order to deliver the first hike of
2016 at its 15th
June policy meeting:
i. US GDP growth and its drivers, particularly productivity and the manufacturing sector (preliminary
Q1 GDP data are due on 28 April);
ii. Real wage and personal consumption growth;
iii. The economies of its main trading partners, including China, the eurozone, Japan, UK and Brazil
where growth has slowed in recent months based on the fall, in some cases quite sharp, in
manufacturing and services PMI in February.
Alongside these necessary, if not sufficient conditions, the Fed may want to witness an ongoing, even if
slow, rally in global energy prices and US and global equity markets. While seemingly not overly concerned
by the dollar’s strength, the Fed will take greater comfort from a stable dollar, or at the very least only
moderate appreciation from current levels.
US elections and UK referendum unlikely to derail very modest Fed rate hikes
The Fed has historically remained apolitical and shown a willingness to look through discrete global events
and there is little to suggest this time will be different. The Fed hiked rates in the run-up to both the 7th
November 2000 and 2nd
November 2004 presidential elections and there is no obvious reason why this
years’ elections would derail a mid-year hike.
Similarly, the Fed is unlikely to be swayed by the UK referendum on EU membership scheduled eight days
later on 23rd
June. While the UK is the second largest EU economy after Germany and a British vote to
leave the EU could at least near-term weaken the UK economy and currency, undermine the EU and
create volatility in global equity markets, the UK ultimately accounts for less than 4% of US exports and
sterling for only 3.3% of the US TWI (see UK referendum on EU membership – Darkness before Dawn, 26
February 2016).