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posted on 05 June 2016

Fed Rate Hike "Cycle" Remains Unlikely

from Lakshman Achuthan, Co-Founder and Chief Operations Officer of ECRI

With all eyes on the timing of the Fed's next rate hike, the reality remains that the U.S. economy will stay in a growth rate cycle (GRC) downturn. What we wrote around the time of the December rate hike remains true today: "With the GRC downturn set to deepen, a full-blown rate hike cycle remains improbable" (USCO Essentials, December 2015).

Notably, if the Fed does manage a mid-year rate hike - which itself is uncertain - that would amount to the longest gap on record between the first and second rate hikes. A full-fledged rate hike cycle comprised of a succession of rate increases remains unlikely in the absence of a GRC upturn, which is not on the horizon. Furthermore, a recession starting late this year or early next year cannot be ruled out. Thus, rate cuts remain on the table over the coming year. Meanwhile, prospects for further rate hikes may run into other difficulties, given the global economic outlook.

In that context, ECRI's 20-Country Coincident Index Growth Diffusion Index (20CIGDI, Chart), measuring the proportion of the 20 economies regularly monitored by ECRI whose coincident index growth rates have improved over a 12-month span, has already plummeted to a 38-month low. Please recall that, in the summer of 2014, in contrast to an upbeat consensus, ECRI predicted a global slowdown on the basis of this data and its long leading index counterpart, noting that, "with the 20CIGDI having rolled over and the [20-Country Long Leading Index Growth Diffusion Index] also in a cyclical downturn, reports of easing growth are likely to become more widespread internationally" (ICO, July 2014).

That became amply evident in the commodity price downturn that began around that time, as oil demand fell below expectations. Subsequently, the oil price decline was framed as an oversupply problem, as oil producers decided in the fall not to cut production.

Today, cyclical slowdowns are more widespread internationally than at any time in almost three years. Given the Fed's recent emphasis on global growth, this may create another obstacle to its rate hike plans.

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