QNB: Rate hike will sink US economy deeper into deflation

GMT 21:54 2015 Saturday ,21 March

Arab Today, arab today QNB: Rate hike will sink US economy deeper into deflation

Qatar National Bank
Doha - QNA

The removal of "patient" from the Federal Reserve Open Market Committee (FOMC) policy statement sets the way for a rate hike in the second half of 2015, QNB said Saturday in its weekly report.
The report warned however that such a move will accelerate the US economy's fall into deflation and will offset real GDP growth. A US rate hike will also intensifies the US dollar squeeze currently underway in the rest of the world. The report went on to add that if the rate hike comes in 2015, "it will significantly worsen the US and the global growth outlook.
The Fed has been hinting that it would remove "patient" from its policy ever since the end of QE tapering back in October 2014. The markets interpreted the change in rhetoric as a potential rate hike in June, leading to a strong rise to the value of the dollar.
QNB's report said this week that the case for a normalization of US monetary policy was clear. The Qatari banking giant said that the FED is eager to reduce its accommodative monetary stance after its balance sheet reached$4.5 trillion. QNB noted that the FED's three rounds of quantitative easing have led to a "substantial increase in asset prices and a mispricing of risk in financial markets." A rate hike would bring an end to those two side effects.
The report then moved on to question whether 2015 was the right time to raise rates, citing that interest rate hikes will put more disinflationary pressure on the US economy making deflation a real threat. Additionally, the report noted that the latest data point to a very weak growth performance in the first quarter of 2015.
"In fact, according to the Atlanta Federal Reserve, real GDP growth in the first quarter of 2015 is likely to slow to 0.3%, compared with 2.2% in Q4 2014," the report said.
The increase in US interest rates would also have negative implications for the rest of the world economy. In anticipation of a US interest rate hike, the dollar has strengthened sharply in recent months, leading to a significant USD squeeze outside the US.
At a time when all other central banks around the world are easing their monetary stance, a US interest rate hike would further exacerbate the shift to dollar-denominated assets and leave the rest of the world economy squeezed for USD. As the history of recent financial crises shows, a USD squeeze is often the precursor of balance of payment crises in Emerging Markets.

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