Ameriprise expects the US economy to grow by 3 percent in 2015, which justifies the beginning of a liftoff; but whether that happens in June or July remains to be seen. After Friday’s GDP number and the latest round of monthly data, the Fed can justify a push-back as long as they want and June-July looks appropriate, he added.
Not so long ago people were fairly convinced of a rate-hike by the middle of this year, but the narrative changed suddenly indicating a hike may not happen before the end of 2015.
Asked to explain, Dave said wage-pressure remains the big variable for the Fed. The central bank’s observation that the big drop in oil prices is driving down CPI and the Personal Consumption Expenditure (PCE) index is correct. Wage-pressure is likely to become a bigger variable by the middle of the year, especially if the unemployment rate drops below 5.5 percent, since it’s not that far away.
The Fed understands these things get baked in and take a little while to show up, so they are likely to be vigilant. But at the very least, they want to move the ball of rate normalization forward. They started with the end of QE and going from raising the FFR from 25 basis points to 50. That’s unlikely to have a big economic impact, but it does a lot when they restock their ammunition, he noted.
The US Fed expressed concern about overseas developments after the latest FOMC meeting. Asked if the US central bank will be successful in insulating the domestic economy, David answered in negative. The dollar will surely be weakened by the ECB’s move, but on balance, the euro’s depreciation is a net positive for the US economy.
If the eurozone grows more than 1 percent this year and the economy gains some traction, then that’s going to help the US in the long run unless the euro drops further against the dollar and retards US exports, he observed.
Asked if the ECB’s agenda was to debase the euro, David said devaluing the currency is part of the game. The euro has dropped quite a bit already and now the target should be to ensure there’s enough liquidity in the system to give confidence that financial activity can take place.
Certainly liquidity and exchange-rates go hand-in-hand, but there’s already a big, big drop in the euro and it’s not clear how far the shared-currency will slide, he argued.
Asked if he’s become a little less sure about his earlier prediction about the S&P 500 hitting 2250 this year, David answered in affirmative. Earnings expectations for 2015 have come down a lot although a lot of that is localized in the energy sector.
In the aggregate, that means knocking down overall expectations and investors could end up in a situation where there is very good economic activity in the US, but not very-good aggregate earnings growth. Right now, it seems it’s going to be a decent year for stocks, but if expectations continue to come down, that could be a point of concern, he noted.
Asked if the debate about the decline in crude prices has been resolved (whether it’s a net positive or negative for the US economy), David said there’s no doubt it’s a net positive for the domestic economy. There has been a decline in oil-rig counts and capital spending in North America – they have fallen 15 percent from their September peak, but that’s a relatively small part of the US economy.
The benefits to consumers more than offset the losses and the CBO this week said the decline adds three-tenths of one percent to GDP, which is consistent with the global the benefit the International Monetary Fund (IMF) talks about. The decline in oil prices is decidedly a net benefit, he concluded.
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