Financial markets expect the US Federal Reserve (Fed) to raise its federal funds target rate on Wednesday for the fourth time this year, by 25 basis points (i.e. between 2.25% and 2.50%). Looking ahead, the FOMC will likely revise its “dots” lower for 2019, while the Fed will emphasise data dependence as relevant for its policy stance, rather than guidance by FOMC ‘dots’.
Neil Dwane (Allianz) | The response of central banks to the financial crisis 10 years ago may have saved the world from a devastating depression, but it also created a host of unforeseen effects – from more indebtedness to more economic inequality. Looking back at what we got right – and what went wrong – what lessons can we take away for the future?
BoAML think that national fiscal buffers will be the only device to face the next cyclical downturn. In fact, with a fairly mild cyclical shock, the Stability and Growth Pact would be severely stressed. The solution can be a growth-stabilising euro area budget. If not, monetary policy may have limited further space.
Ignacio de la Torre | The ECB’s deposit rate, which is now at -0.4%, will move to -0.2% during 2019 and later to 0%. At the same time, during the second half of 2019 the logical thing is for the ECB to begin to raise interest rates. These two factors should fuel a progressive rise in the Euribor from the summer of next year.
The biggest economic threat today is not the interest rate, nor the exchange rates, nor the possible trade war fuelled by Trump: it’s the debt accumulated by countries across the world. This has increased 12% of GDP since the crisis, totalling 225% of global GDP. Starting with China, followed by Europe and ending up with the US, the threat from the current and future debt is terrifying.
“If we analyse the data from the last 25 years, there is very little inflation. Underlying inflation in the US has never really fallen below 1% which means that the secular dynamism in the labour market is reducing inflation, via technology and globalisation,” explains Bruce Kasman, chief economist at JP Morgan.
In his first congressional testimony, Jerome Powell delivered an upbeat appraisal of the US economy. In his own words, headwinds have turned into tailwinds. While avoiding any commitment on the plausible monetary stance, markets have discounted a faster pace in rate hikes, pushing bond yields to fresh highs.
The welcome the financial markets have given the new Fed chairman (Jerome Powell) shows that the end of the monetary normalisation process in the US is not going to be a bed of roses, despite the fact his predecessor (Yellen) left with a good part of the dirty work already well underway.
Benjamin Cole | The last filmy slips of fabric have been stripped away, and macroeconomists must now view the once-romanced US Congress in flagrante delicto with a real paramour: Mr. Big Bucks Deficits. From here, a premise of Federal Reserve monetary policy must be that it takes place alongside $1 trillion annual deficits.