NAB predicts three Fed rate hikes for 2016

The US Federal Reserve is likely to implement three further rate hikes in 2016, but inflation and market stability must persist in order for the central bank to follow through, NAB says.

In an economic update, NAB said the US Federal Reserve is likely to raise rates three times this year, with the first to be introduced in March.

“We currently expect the next hike will be in March but, at a minimum, this will require more stable financial markets, an improvement in activity measures, and no further slippage in either core inflation or inflation expectation measures,” the bank said.

The Fed will also be watching the movement of the US dollar, according to NAB.

“While the Fed views appreciation impacts on inflation as transitory, a stronger dollar nevertheless represents a tightening in financial conditions which could delay future rate increases,” it said.

NAB pointed out that inflation remains subdued as a result of the impact of the rising US dollar on import prices and depreciating energy costs.

Regarding the economy’s GDP numbers, NAB predicts that GDP for 2015 will come in at 2.4 per cent and 2.3 per cent in 2016. While both forecasts are a 0.1 per cent downward revision, NAB said employment remains strong.

“Non-farm employment grew by a very strong 292,000 in December, and the weaker growth in August/September already seems a distant memory,” it said.

“Employment growth is strong and more than enough to bring unemployment down over time. While the unemployment rate has been unchanged in the last two months, this reflects an increase in workforce participation – another sign of labour market healing.”

Global investment management firm Pimco forecast earlier this month that the Fed will raise interest rates three times this year despite the central bank indicating that four interest rate hikes is “in the ballpark”.

[Related: Fed rate hike won’t force RBA’s hand, says economist]

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