1 GLOBAL GROWTH OUTLOOK US: Growth via Tangential Quantitative Easing The US economy had been in recovery mode in 2014 with big improvements in GDP and the unemployment rate, which fell to its lowest level since 2008. Inflation was the one weak spot, as it was stubbornly lower than the Fed may have desired; however, it remains stable as we move into 2015. Those who were expecting the US economy to fail miserably once monthly stimulus from the Federal Reserve ended in October were briefly validated as stocks tumbled in the immediate days following the announcement, but rebounded thereafter and appear strong heading in to the end of 2014. Despite the dangers of weakness in the economies of Europe and Asia to the US, the measures taken by those other nations could actually help the US maintain its current level of strength, especially if we see the ECB embark on QE at some stage in 2015. All in all, the future looks bright for the world’s largest economy, and if oil prices continue to decline as they have in the latter half of 2014, the US may keep this momentum going even if the Fed starts to increase rates to a more historically normal level at some stage this year.
Source: tradetoday.biz

Federal Reserve: Committed to Hawkish Policy? The Federal Reserve is expected to take its first steps towards normalizing monetary policy in the middle of 2015, with the market anticipating a rate rise sometime in June or July. The US is in a position of cyclical leadership with the economy doing well, particularly the jobs market, and the US managing to buck the global disinflation trend. The US created over 300,000 jobs in November, but more important to Fed policy was the 0.4% rise in hourly earnings for November, which was the largest monthly rise since October 2011. The expected rate rise from the Fed has been one of the major factors behind dollar strength in 2014. The greenback has outperformed all of the major currencies and all of the emerging market currencies bar the Indian rupee (INR) and the Hong Kong dollar (HKD). Due to the divergent monetary policy paths between the Fed and other major central banks, the dollar is in a good position to continue to outperform in 2015, at least for the first half of the year. In the first few months of 2015 we think that the focus will shift towards what the Fed will do after the first rate hike. Right now the market is looking for two further hikes for the rest of the year, which has been supported by the economic data; however, the bigger risk in our view is that the Fed is not as hawkish as some expect. The Fed may have adopted a hawkish tone at its October meeting, but it could change its tune if the economic data starts to deteriorate or if the US catches the disinflation bug from the steep drop in oil prices. The other major risk to the Fed outlook is the dollar. So far the Fed has been remarkably tolerant of a strengthening greenback while other major central banks have been happy to see their currencies depreciate, including the Bank of Japan and the ECB. If the strong dollar trend continues in the first half of next year, the Fed may decide that it no longer wants to lose the race to the bottom. If the Fed starts to talk down the prospect of multiple rate hikes next year then we could see a sharp reversal in the dollar, and some respite for emerging market currencies that have fallen sharply against the greenback including the Brazilian real, South African rand and Russian ruble. While we expect the dollar to reign supreme in Q1 2015, its performance for the second half of the year could be tricky depending on the Fed’s tolerance of dollar strength. FX markets could face another year trying to parse Fed statements to see if Fed members are happy with the level of the buck. Thus, 2015 could be a year of two halves for the Fed: the first half could be about making the long-awaited rate hike, while the second half could be a more cautious Fed who tempers its rate-hike talk to limit dollar upside.