British inflation eases

Economists said after the referendum on Brexit that a temporary spike in the inflation rate could be expected due notably to the British currency depreciation.
That’s what has happened with a peak in November 2017 at 3.1%. After this date, the inflation rate is receding at less than 2.5% in March 2018. The core inflation rate has followed the same profile with a current rate at less than 2.3%.
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ECB rate: an amazing calculation

Central bankers are very attentive to the unemployment rate even if it is for different reasons. In the US, Janet Yellen’s main target was the unemployment rate and she drove the USA economy to full employment at the end of her mandate. Mario Draghi doesn’t focus too much on the unemployment rate during his press conferences. But when we look at low inflation pressures in a Phillips curve we can anticipate that the equilibrium unemployment rate is lower than what we previously thought. It will have to be lower than now to generate inflation pressures.
The comparison of the US and EA unemployment rates is amazing as they follow the same post recession trend Continue reading

The Fed increases its rate, but more to come

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.
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Jay Powell, the US economy’s new leader

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 US economy’s worrying change of pace – My Monday column

Is the US economy’s current pace set to trigger major imbalances, disrupt the current cycle and spark off a significant downturn in economic activity?

The stockmarkets’ severe recent downturn reflects investors’ concerns on forthcoming trends for the global economy, and in particular the performances we can expect from the US. Firstly, they reacted to the change in stance from the Federal Reserve on forthcoming inflation trends, expected to converge towards the central bank’s target of 2% and stay there in the long term. Secondly, rising wages confirmed this idea of nominal pressure, even if the 2.9% gain announced in January’s figures was probably a result of the reduction in number of hours worked due to unusually cold weather conditions. Lastly, the handover at the Fed added another level of uncertainty. Janet Yellen did a good job of steering the US economy, will Jay Powell do the job equally well?
I have already written at length on these matters, and an article published on will provide details on the uncertainties surrounding Powell’s arrival to chair the Fed. However, looking beyond these factors, a number of other questions are being raised about the US economy.

The first question involves economic policy and the way fiscal and monetary policies can coordinate against a backdrop of full employment. This coordination has worked pretty well so far. The US economy nosedived in 2009 and both policy areas instantly loosened: it was vital that every effort be made to avoid a drastic chain of events that would end up creating higher unemployment and a long-term hit to the standard of living. This approach was successful and the country hit its cycle trough in the second quarter of 2009, moving into an upward phase that has lasted ever since. Monetary policy continued to accommodate, but fiscal policy became restrictive in 2011 and then converged to a sort of neutral situation to avoid hampering the economy. This policy combination drove the US into one of the longest periods of growth it has enjoyed since the Second World War: the pace of GDP growth was admittedly not as brisk as before, but it did not trigger any major imbalances, as reflected by an economy running on full employment and continued moderate inflation, remaining below the Fed’s target. Continue reading