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.
Inflation figures at 1.1% in February do not trigger expectations of a fast and sharp change in the ECB’s monetary policy, and Mario Draghi and Peter Praet did not indicate that they were in any hurry to implement swift or sudden change in their comments at the end of last week.
The ECB’s monetary strategy is dependent on reaching inflation in line with its medium-term objectives: the 1.1% figure does not point in this direction.
The chart below shows the contribution from each of the three main sectors to the rise in inflation, and we can see that none of them display a marked uptrend. Continue reading
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
Jerome Powell nomination as President of the Federal Reserve has not created a disruption *. He was in Janet Yellen’s line on macroeconomics and on monetary policy. Nevertheless he is perceived as more market friendly on regulation than Yellen. He is perceived as someone who will maintain low interest rates and that will modify financial and banking regulation. For this he cannot be wrong in the eyes of financial investors in Wall Street. It’s also an agenda that is consistent with the White House wishes on monetary policy.
But we cannot stop here the analysis. He is not a specialist of monetary policy at a moment where the Fed is normalizing its monetary policy. The Fed is beginning an extraordinary process that consist of increasing interest rates, shrinking the size of its balance sheet and maintaining the low unemployment rate and an inflation rate close to 2%. Being able to satisfy all these objectives is and will be the most difficult task for a central banker.
It can be a terrible task for someone who is not a specialist of the monetary policy theory as Bernanke and Yellen were. Why? Because the economy has shocks positive or/and negative and that there is a need for a rapid adjustment of the monetary policy.
Until now Powell has followed the trajectory decided by Yellen. What will happen when he will have to create the trajectory? The success of the Fed depends a lot on what its president does. We know that the personality of the president of a central bank is key in the credibility of the monetary policy and in the way it is conducted. We’ve seen that in the Euro Area with the nomination of Draghi that has completely changed the picture and probably saved the Eurozone. Continue reading