The Federal Reserve has increased its main interest rate by 25 basis points. The corridor for the fed fund’s rate is now [1.5 – 1.75%] versus [1.25 – 1.50%] since December 13, 2017. The dots graph which represents FOMC members’ expectations of the fed fund suggests that the US central bank will hike its rate 3 times in 2018 (already one is done), 3 times in 2019 but only twice in 2020. The rate’s profile contained in the dots graph is unchanged even if growth expectations are stronger according to these same FOMC members.
The stockmarkets took a real rollercoaster ride the week of February 5, with the Dow Jones plummeting more than 1,100 points in a single day’s trading on February 5, the most severe decline in its history in number of points, although only 4.6% in relative terms as compared to the 22.6% crash on October 19, 1987. The index shed a further 1,000 on February 8. US indices had put in spectacular rallies since the start of the year and their growth was not sustainable, so a change in trend was inevitable.
However, this market shift remains a clear sign from investors, and comes just as the Fed undergoes a change in leadership. Janet Yellen took her final bow on the evening of February 2 and Jerome Powell was sworn in on February 5. Market losses and the change in leadership at the Fed are connected: the US central bank is very powerful and the choices it makes over the months ahead will be crucial for both the US economy and market performances. Continue reading
The Bank of England has increased its main rate by 25 basis points to 0.5%.
Two reasons to explain this movement
1 – The British economy has changed and its productivity trend is much lower now than before the crisis. This means that the risk of overheating is associated with a lower growth rate than before the crisis. Therefore the BoE has to move more rapidly than in the past, the equilibrium BoE interest rate is lower.
Nevertheless, if Brexit is a source of weakness according to the BoE it is not a source of rupture (this can be discussed). The economic scenario of the BoE is quite optimistic as it suggests that productivity growth could improve converging to the momentum seen in other developed countries. Continue reading