First it was Morgan Stanley, and now it's
Ron Insana.
The venerable investment bank predicted this week that the Federal Reserve would hold off raising interest rates until March 2016. And the star CNBC commentator said that the Fed is likely to wait until next year as well.
The dollar's surge, which has sent it to multi-year highs against a range of currencies will keep the central bank on hold, Insana predicted. The dollar's jump is "a de facto tightening of monetary policy," he said on the air.
That's because it lowers the price of imports in dollar terms and raises the price of exports in foreign currency terms, helping to curb exports. All that is deflationary, and it comes at a time when the Fed is trying to push inflation up to 2 percent from 1.4 percent currently.
"Under normal circumstances, a stronger dollar would represent not only growth accelerating here, but it would also shrink the supply of money, which is not an issue at the moment. But it is disinflationary by nature," Insana explained.
"The rule of thumb is every 10 percent increase in the value of the dollar is equal to a 50 basis point tightening from the Fed. It's [the dollar's increase] at 17 percent. You are talking about a 75 basis point tightening under normal circumstances with this increase in the dollar. It tends to slow down, dampen economic activity and as we're seeing already, cut into corporate profits."
Meanwhile, economies overseas are in trouble. "It's not just the dollar strengthening, it's the rest of the world weakening," Insana says. That has a dampening effect on the U.S. economy.
Therefore, "the Fed will miss its inflation target and so will almost every other developed country in the world."
As for Morgan Stanley, its economists pushed their timeline for a Fed move to March 2016 from January 2016 because of a downward revision in their oil price forecast, they wrote in a commentary obtained by
Business Insider.
The analysts now forecast Brent crude will average $52 a barrel this year, down from their December prediction of $88.
While every 10 percent drop in oil prices lifts GDP growth by 0.1 percentage point, it trims inflation by 0.5 point, the economists say.