There’s an interesting reason why the Fed might not be able to hike rates in 2016

A man poses after a campaign event for US Republican presidential candidate Donald Trump at an airplane hanger in Rochester, New York, on April 10.
Reuters/Carlo Allegri

Deutsche Bank has an interesting argument for why the Federal Reserve may not be able to raise interest rates at all this year.

In a note on Monday, Joe LaVorgna, Deutsche Bank’s chief US economist, argues that the Fed may be unable to move because its policy meetings coincide with key events on the election calendar.

The Federal Reserve expects to raise its benchmark rate twice this year.

LaVorgna said that a rate hike in April is unlikely because of expectations for weak first-quarter growth.

In June, the Fed’s hands may be tied for the same reason. Also, there’s the British referendum on whether to remain in the European Union a week after the Fed meeting on June 23 that, combined with a rate hike, could spike the dollar.

Here’s LaVorgna on the other meetings (emphasis added):

While a rate hike at theJuly 26-27meeting is possible, its odds are somewhat reduced by the fact that there is no press conference after this meeting. Note also that this meeting coincides with the Democratic National Convention (July 25-28) and is only a few days after the Republican National Convention (July 18-21). The September 20-21FOMC meeting is relatively close to the Presidential Election (November 8), so unless there is strong evidence that the US economy is growing above trend, and global financial markets are relatively stable, we expect the Fed to refrain from hiking in September. We highly doubt the Fed would raise rates at its November meeting, which is six days before the US election.

We haven’t yet seen any huge market moves based on projections for the elections, or who has won certain key states and so on.

But some strategists have written that the final results could be a risk to investors at the end of the year.

For example, David Bianco, chief US equity strategist at Deutsche Bank, wrote last month that the S&P 500 would likely stay in a narrow range until investors get a clear sense of America’s political future. And the first good snapshot will come only on November 4.

By that time, the Fed would maybe be able to shift focus solely on the economy.

LaVorgna said (emphasis added):

If by theDecember 13-14 FOMC meeting underlying GDP growth were tracking above 2%, then perhaps the Fed could raise rates. The futures market is signaling essentially the same scenario:The implied probability of one 25 basis-point rate hike this year is barely above 50%. Given our tepid expectations of real GDP growth, the risk is that the Fed does not hike at all this year.

The Federal Open Market Committee’s 2016 calendar.
Federal Reserve