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Stone McCarthy: No More Hikes This Year, Debt Ceiling Can Derail Fed's Balance Sheet Plans

While most other sellside reports have toed the line that the Fed will announce a September balance sheet reduction, coupled with a rate hike in December, Stone McCarthy has turned more bearish on the US economy, and in a note released moments ago by Terry Sheehan, writes that "we continue to expect that the FOMC will announce the change in reinvestment policy at the September 19-20 meeting to start in October" but cautions that "this could be delayed if it looks like an increase to the debt limit is not immediately forthcoming, and with it the risks of the US default on its sovereign debt" and, more importantly, does not see any more rate hikes in 2017.

His note below, courtesy of Stone McCarthy:

  • Due to the disappointing inflation numbers, we do not look for another rate hike in 2017, and for only two in 2018.
  • As expected, FOMC maintained the fed funds rate target range at 1.00%-1.25%. Forward guidance still for "gradual increases" in rates, depending on data.
  • Balance sheet normalization to begin "relatively soon", but specific timing not announced. The wording would suggest a September announcement is on the table.
  • Little change in content of FOMC statement on jobs, inflation expectations. Language on inflation suggested slightly greater concern that lower readings will linger.
  • Labor market "continued to strengthen", activity moderate "so far this year".
  • Inflation measures "have declined" and "running below" the 2% objective, a small change the reflects more concern about a sustained inflation undershoot from the "running somewhat below" in the June 14 statement.
  • Inflation expected to "remain somewhat below" objective "in the near term, but to stabilize" over the medium term.
  • Near term risks "roughly balanced", "monitoring inflation developments closely".
  • At this writing we continue to expect that the FOMC will announce the change in reinvestment policy at the September 19-20 meeting to start in October. However, this could be delayed if it looks like an increase to the debt limit is not immediately forthcoming, and with it the risks of the US default on its sovereign debt.
  • Due to the disappointing inflation numbers, we do not look for another rate hike in 2017, and for only two in 2018.