Oil prices are soaring out of control to slightly above $75/bbl, while the greenback is gaining ground again, and now stands at under 1.2 to the euro with its effective exchange rate rising swiftly and triggering uncertainty on the markets, particularly emergings.
Meanwhile, wages are still not rising in the US, despite unemployment falling below the 4% mark for the first time since December 2000: at the time, the reference wage was up 3.8% vs. an increase of merely 2.6% in April 2018.
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 hefty fiscal stimulus in the US involving a rise in spending (1% of GDP in 2018 and 2019) and the implementation of tax cuts should be seen as a shock for the international economy. The uniformity of economic policy across developed countries, which acted as the driver for the growth recovery witnessed since 2017, is now just a distant memory.
Fiscal policy in the US will clearly trigger an adjustment between economic blocks and particularly between the US and the euro area and thiswill necessarily involve the exchange rate. The greenback has so far tended to lose value, regardless of whether we look at the effective exchange rate (nominal or real) or the dollar/euro rate.
The big question now is the dollar’s trend over the months ahead. Will the greenback gain value or must it inevitably fall as a result of the imbalances triggered by policy from the White House and Congress?
There has been something of a logic in the trend between monetary policy expectations in the US and the euro area, and the euro/dollar exchange rate since 2007. Expectations of more restrictive monetary policy in the US led to gains for the dollar right throughout this period, as shown by the chart below. However, we can see that since the Fall of 2017 there has been a clear divergence between the two indicators. The exchange rate stands at 1.24 while monetary policy expectations put it more towards parity.
It is important to understand this point at a time when economic policy is changing in the US.
It is worth looking back to the start of the 1980’s when the greenback gained considerably as a result of much higher real interest rates in the US than in other developed countries, reflecting the impact of Paul Volcker’s very restrictive policy when he chaired the Fed at the very start of the 1980s and then the effects of Reagan’s very expansionary fiscal policy, which led to a long-lasting deterioration in the fiscal balance and the current account balance. Continue reading →
Minutes of the Federal Reserve
The good thing with the minutes of the last meeting of the Monetary Policy Committee of the Federal Reserve is that you can find what you want to find.
The main sentence to perceive this is the following “Members generally agreed that, before taking another step in removing monetary accommodation, it was prudent to accumulate more data in order to gauge the underlying momentum in the labor market and economic activity. A couple of members preferred also to wait for more evidence that inflation would rise to 2 percent on a sustained basis.Some other members anticipated that economic conditions would soon warrant taking another step in removing policy accommodation.(page 12)”
The first part tells that the FOMC is cautious but the end of the sentence tells that improvement in macrodata could lead to a new strategy.
The Fed is also very attentive to the international context forcing the US central bank to remain cautious “In addition, it was noted that the dollar is a principal reserve currency and that monetary transmission in the United States occurs through funding markets that are quite globally connected.(page 3)” Continue reading →
The chart below shows the two shocks that have hurt the Euro Area since 2007.
In red is the period following the Lehman bankruptcy. For the Euro area it was a strong exogenous shock on its economic activity and on its unemployment rate. From October 2008 to April 2010 unemployment rate was up by 2.4% from 7.8% to 10.2%. The impact was long lasting but all the plans that were put in place in 2009 by governments were able at the end to support activity and to stabilize the Euro Area unemployment rate. Continue reading →