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US Fed will hike rates very gradually in 2016

Thursday, January 21, 2016

Growth is likely to have slowed at end-2015, raising uncertainties about business momentum heading into 2016

Updated: May 19, 2016

June US interest rate hike is more likely · All Updates

US fourth-quarter 2015 GDP growth is expected to have slowed to an annualised 0.8%. Inflation might return closer to target in early 2017. The unemployment rate will approach its longer-run trend, seen by the Fed at 4.9%

Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Bloomberg, Oxford Analytica

Outlook

GDP growth will accelerate slightly above 2%, before slowing down again closer to potential growth. Risks are to the downside and relate to the renewed oil price drop, which is likely to hold down business investment further in the oil and gas sector. The strong dollar and weak global growth prospects are also likely to weigh down US growth through their impact on net exports.

Private consumption remains the bright spot again, likely to be the main source of growth in 2016, as in 2015, helping offset weakness in the industrial and trade sectors. Job growth rebounded strongly in the fourth quarter of 2015. It is likely to decelerate again in 2016, as growth approaches potential, estimated at 2%.

Impacts

  • Residential investment will keep growing, supported by favourable demographic trends.
  • As the output gap narrows, core inflation will accelerate gradually.
  • After the December rates lift-off, the next hike is more likely at the June meeting than in March.

See also