Fed outlook: further delay is likely

The probability of a September hike in the fed funds rate has slipped below 50%. With the global growth outlook worsening and the dollar rising, a September hike could exacerbate declining risk appetite. Furthermore, recent developments may have modestly reduced the likelihood that US core inflation will rise toward 2% in the medium term.

"Our upbeat view on US growth is unchanged. Next week's revisions could push Q2 growth above 3% and first half GDP to nearly 2%, close to the trend of recent years. Consumption likely grew close to 3% in Q2, powered by falling energy prices and increasing labor income. These conditions are likely to remain in place, and energy investment is unlikely to fall sharply again, despite still falling oil prices. We expect second half GDP to grow at about 3%", says Credit Suisse.

However, there are still few signs that nominal GDP growth, core inflation, or wage inflation is accelerating. There is thus no urgency for Fed hikes apparent in these key indicators.

Conditions outside the US are worsening due to falling commodity prices, a weak Chinese economy, and ongoing expectations of dollar appreciation (which is a magnet for capital to flow toward the US and away from smaller economies which need liquidity now). The outlook for headline inflation around the world is clearly worsening, even if the outlook for core US inflation has been impacted only modestly, if at all.

September is still a close call. A sharp risk rally and commodity rebound in the coming weeks could still prompt a hike. As could, of course, sudden news that wages, inflation, or nominal growth is running much higher than expected.

"As for beyond September, we still expect one rate hike by year-end and think the odds of a hike for each meeting in the next 18 months is close to 50%. That includes the October and December 2015 meetings. Contingent on upcoming data, our official call for the first Fed rate hike is now December 16, 2015", notes Credit Suisse.