The communication released after the Fed’s June meeting, along with the publication of the system it will use to potentially reduce its balance sheet, shows there is strong support for continuing with the normalisation of US monetary policy.
The US economy has entered its ninth year of growth and the recovery could last over 10 years, clocking up a new record. At this stage the doubt surrounding an atypical recovery is whether the best thing is for the Fed to maintain its monetary policy of the last few months and continue to gradually raise interest rates, despite the absence of inflationary pressures.
There are various ways of measuring the volatility of equities, but for me the most representative are: a) what is known in the Anglo-Saxon world as the fear index, VIX, and b) the ample range formed by the intra-day movement of an asset price. In other words the difference between the maximum and minimum level of a share price or index within the same day. As Víctor Peiro from GVC Gaesco points, if we look at the performance of this volatility index, both for the US and European indices, we can see we are close to record lows.
J.L.M. Campuzano (Spanish Banking Association) | According to IMF data, the pace of growth of productive investment has slown in economies which are emerging and in the process of developing from levels of 10% in 2010 to 3.6% at the moment.
Little did observers expect Fed Chair Janet Yellen’s energetic and upbeat account of economic prospects ahead. They discovered, much to their surprise, that underperforming inflation data was brushed aside as she shifted to forecasts tailored to match with the rate stiffening.
After building-up for several years, the view that the Fed should increase its inflation target has “boomed”. The July 1996 FOMC Meeting witnessed an extended discussion of inflation targeting. Interestingly it was Janet Yellen and Laurence Meyer´s first FOMC Meeting. Interesting because they are the two strong Phillips Curve adepts!
José Luis M. Campuzano (Spanish Banking Association) | Citi flags that the US/Euro Area monetary conditions have noticeably narrowed since the start of the year. Financial conditions have relaxed in the US and tightened in the Eurozone mainly due to the trend in the relative exchange rate.
There is a 100% possibility that the Federal Reserve will raise rates today. As a result, the interest rate outlook won’t be the subject of debate and the interest, more than ever, will be on how the Fed is going to manage its balance sheet. What’s clear is that the Fed’s balance sheet will remain bigger than it was in the past.
Francisco Vidal | The emphasis put on the Federal Reserve’s actions and the US’ economy’s favourable performance over the last few years led to the debate over the possibility of the euro and the dollar reaching parity, which gained momentum at end-2016 and at the start of 2017. But the euro’s fundamentals are currently better than expected and, in the future, can count on the support of the ECB.
Should we be worried by the fact that the Fed is reducing its balance sheet? David Buckle from Fidelity is one of those who think not; moreover, he believes that it won’t have any impact on the financial markets.