THE FED AFTER THE “NO”

By John J. Canally, Jr., CFA Chief Economic Strategist, LPL Financial

Weekly Economic Commentary, 7/9/2015Weekly Economic Commentary image

The “no” vote in the Greek referendum on July 5, 2015, will potentially raise the level of economic and financial market volatility in the coming weeks as global investors assess the market and economic risks associated with an increasingly likely Greek exit (Grexit) from the Eurozone and from the Eurozone’s common currency, the euro. We don’t view the potential Grexit as another “Lehman moment”; there is relatively little in the way of derivatives tied to Greek debt, and the vast majority of Greece’s debt itself is owned by supranational entities like the European Central Bank (ECB) and the International Monetary Fund (IMF), and not — as was the case with Lehman — by private investors. However, the next several weeks and months may see increased financial market and economic volatility in the Eurozone and across the globe.

From the perspective of the U.S. economy, the uncertainty surrounding the possibility of a Grexit may lead to:

  • Slower global economic growth, which, at the margin, may hurt U.S. export growth
  • ƒƒA later liftoff for the Federal Reserve (Fed); and once hikes do begin, a shallower path for rates
  • A stronger U.S. dollar for longer, as the ECB will likely speed up its quantitative easing (QE) program
  • ƒƒAn increase in economic and market uncertainty in the U.S., which could, in turn, lead to modestly slower growth

The potential for a Grexit comes at a time when the Eurozone’s once-fractured financial transmission mechanism is on the mend, and as the Eurozone economy — aided by lowered expectations and a weaker currency — is accelerating and on track to add to global growth in 2015. Now, regardless of whether Greece stays or goes, the Eurozone’s recovery is threatened by lower consumer and business confidence in the Eurozone and a disruption in, but not the end of, the improvement in the Eurozone’s financial transmission mechanism, which has been healing for more than six months now. Although the financial system disruptions of a Grexit will likely be met by strong action from the ECB, the longer the uncertainty around Greece’s fate lasts, the greater the potential impact on the European and global economies. The net result could be a lower growth path for Eurozone and the globe. The Federal Open Market Committee (FOMC) and Fed Chair Yellen — who is slated to deliver a speech on Friday, July 10, 2015 — will be watching Greece closely. For now, our view remains that the Fed is on track to hike rates for the first time in this cycle in late 2015; but the longer the uncertainty around Greece lingers, …Read the Full Report here: Economic Commentary 07062015