“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.
The trend in inflation is confusing those in charge of monetary policy. After a significant uptick in the last part of 2017, it has really stagnated, in stark contrast with the growing dynamism of the economy.
There’s an idea circulating amongst the central banks or, more accurately, amongst pressure groups in the central banks. The crux of this idea is: “the central banks should normalise interest rates”.
In her last press conference as Fed Chair, Janet Yellen showed no visible signs of emotion or resentfulness, taking her wholly unjustified dismissal with notable fortitude and good spirits. For all her weaknesses, both observers and markets will miss her unbiased attitude, conscientious dedication and economic mastery.
As expected by markets, the ECB announced that it will continue buying bonds in 2018, albeit at a reduced pace of monthly €30bn for another nine months until September 2018.
The central banks are still powerful. They can make the financial markets rise or plunge them into the doldrums. But the CBs need to scrutinise the financial system and its systemic risks more closely.
The non-banking sector in Europe currently accounts for 54% of total assets versus 42% in 2008. But interestingly, it’s in Germany and Spain, amongst the big countries, where banks maintain their weighting in absolute terms and in relation to their products.