The US Federal Reserve will not hike interest rates in 2016 unless inflation expectations pick up significantly and there is evidence the US will avoid a recession, says Western Asset Management.
Commenting ahead of the US Federal Open Market Committee (FOMC) decision on interest rates today, Western Asset Management portfolio manager John Bellows said the credit market will need to improve before the Fed considers hiking rates.
"US economic data has slowed and financial conditions have tightened: US equities have fallen by 6 per cent and corporate bonds have significantly under-performed Treasuries of similar duration," Mr Bellows said.
"The Fed has been slow to respond to the turbulence in markets, but this slowness is somewhat intentional as the Fed doesn’t want to overreact to noisy signals," he said.
The market will be closely scrutinising the statement by Fed chair Janet Yellen, Mr Bellows said.
"In addition to marking down their outlook for hikes this year, one change the Fed could make at the March meeting would be to focus on ‘actual’ inflation, rather than on 'actual and expected' inflation," he said.
"This would emphasise its commitment to getting inflation higher, and downplay its reliance on models and forecasts. We think it is unlikely the Fed will look into negative interest rates.
"If the Fed is in fact on hold, this could provide a tailwind for some of the currencies that have been under pressure recently, including the Canadian dollar and the Mexican peso," Mr Bellows said.