Not everything is clear through a crystal ball. The Fed is in the process of “normalising” interest rates, but one has to ask whether anyone really believes this…In other words, it appears the market is not convinced that the economy is getting stronger, nor that the inflation rate is hugely threatening.
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.
José Luis M. Campuzano (Spanish Banking Association) | It’s been balance sheet adjustments and the worsening of the deliquency rate which have been mainly responsible for the deterioration in banking margins over the last few years. It’s important for the ECB to establish a clear strategy for monetary normalisation for the future.
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.
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.
J.L.M. Campuzano (Spanish Banking Association) | From recent ECB statistics, there would seem to be a recovery in financing in line with the monetary authority’s implict goal when it implemented its extreme measures.
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.
J.L.M. Campuzano | On Thursday, the ECB confirmed what many analysts were expecting: the limit on expansive monetary measures has now probably been reached, without this meaning there will be an immediate reversal. And the reason for this? Simply that the risks are more balanced now.
There are still divergences between the monetary policies of the Fed and the ECB. But if Draghi meets expectations for progressive withdrawal of the stimuli from September and rate hikes in the first few months of 2018, a new “currencies war” is not on the cards in the near future.