What would happen if the Fed never raised its rates again?

A large majority of the FOMC has declared itself favourable to the exit from the zero-rate policy (ZIRP) before the end of the 2015, but this is not an unconditional commitment on the part of Janet Yellen and her colleagues.

Whilst the recent upsurge in volatility on the markets has pushed the Fed to defer this moment, we can imagine a different pretext at the next meeting and then at the following one, etc. In short, it would be worth considering the implications of a long (H2 2016), or definitive, postponement to the Fed's rate-hike cycle. The dollar could depreciate. A number of central banks (PBoC) might welcome this, but not the ECB or the Bank of Japan.

No monetary war...but perhaps a guerrilla skirmish

For the majority of market players, the Fed's decision to maintain its zero-rate policy (ZIRP) in September was anticipated. What was somewhat surprising, however, was the cautious tone employed by Janet Yellen at the press conference. Whilst not ruling out a first rates hike at the next two meetings, she expressed no great rush to launch a cycle of normalisation. That said, a number of FOMC members said that, for them, it was a close call. The Fed's central scenario (to which we adhere) is that rates will be raised within the next few months but then subsequently the pace of increase will be much slower than in the past.

However, we cannot entirely rule out an alternative scenario in which the Fed is prompted to substantially push back the beginning of the rate-hike cycle beyond mid-2016 or even 20171. This is currently the opinion of a very small minority of FOMC members (left-hand chart). The macroeconomic situation in which the Fed would opt for such a postponement would be one where inflation remained well below the 2% target. Incidentally, even the more dovish members of the FOMC expect inflation to rebound next year (right-hand chart). It is not difficult to imagine the factors that could cause inflation to underperform in the short term: a fresh decline in the price of oil and raw materials, a slowdown in the pace of growth in reaction to the weakening of external demand or a correction in the financial markets. Such a monetary scenario, because it is not anticipated by the market, would drastically alter the outlook for the dollar. It is very likely that the US currency would initially suffer downward pressure, due to forces opposite to those which caused the increase in 2014 and 2015 (the anticipation of the end of ZIRP). In the following sections of this note, we haveexamined the possible reactions of the other central banks.

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