The end of the reduction of the Fed’s balance sheet is what we have to keep in mind after the publication of the minutes of the last FOMC meeting. It will take place during the second half of this year.
The US Central Bank does not want to be too constrained in the management of its monetary policy. The pace that was taken and the level targeted until then could add to the difficulty of the good calibrage of the monetary policy.
The Fed clearly does not want to be constrained in its choices because the global environment which is now more uncertain.
The way Yellen initiated the downsizing movement of the balance sheet was possibly compatible with a stable and predictable international environment. The arrival of Trump has created noise and spillover effects because of its policies. Now the Fed must take into account these noises and the risk of contagion which are attached to them.
The Fed does not yield to Trump by not raising rates, but it does not raise them in order to be able to intervene quickly to contain the negative effects of the policy pursued at the White House. She wants to be agile to limit risks. It’s well thought out.
Interesting remark from Bloomberg @economics. After Chinese retaliation measures, Trump has decided to extend tariffs to USD 200bn of Chinese imports in the US. What will be the Chinese reaction as US imports in China have not this level. The trade war will damage growth for sure
During the first quarter, growth was robust in the US and in Spain, slightly lower than expected in France and weaker than anticipated in the United Kingdom.
The first graph shows the GDP quarterly change since 2015, the annual average growth for the last 3 years and the carryover growth for 2018 at the end of the first quarter.
The US growth was, for the first quarter, at the same level than the 2017 average at 2.3% Nevertheless, the figure is slightly lower than the last three quarters of 2017. The impact of the strong fiscal policy is not seen yet in these numbers. The carry over growth for 2018 is at 1.7%.
The 2.2% trend seen since the beginning of 2011 is still the framework for the US growth dynamics. (see the graph on the French version of this post)
In Spain, growth figures are strong since the beginning of 2014 even if the momentum has been a little lower for the last three quarters. The trend is almost linear at 3.2% since 2014. The carryover growth for 2018 is 1.8%
In France, growth was just 0.3% (non annualized) after 0.7% during the last 3 months of 2017. In fact the first quarter figure is just a correction after the 2017 non-sustainable path for the French economy. The current trend (since 2013) is 1.3% for France, therefore 2% was too much to be sustainable. I maintain my growth forecast at 2%.
The carryover growth for 2018 is 1.2% at the end of the first quarter.
In the UK, the trend is clearly weaker since the Brexit referendum. The second graph shows the real GDP level and the trend calculated from 2014 to Q2 2016 (the referendum was on June 23). We see that there is a huge and enlarging gap between the trend and the real GDP profile. It is the cost associated with the Brexit decision. There is no reason to see a reversal in this gap. The carryover growth for 2018 is 0.7%.
Life expectancy used to be high in the US. The graph shows that it was higher than the OECD average. This has dramatically changed since the late 90’s. Life expectancy is now lower than the OECD average. It was +1 year vis a vis the OECD average, it is now -2 years: a dramatic change.
More than that, life expectancy is decreasing in absolute value in 2016. It was already the case in 2015. This has to do with the opioid crisis but not only.
Do you think it is the best moment to limit access to Obamacare for the poorest? Certainly not – Something wrong in the US
Read this article from the Wapo http://bit.ly/Wapo-esp-vie-US
Stan Fisher the Fed’s vice president has decided to resign at mid-October for personal reasons. This will dramatically changed the internal equilibrium of the Fed’s board. Until now, three seats were vacant but there were 4 members appointed by Barack Obama. Their mandates are going at least beyond 2020 for all of them. The numerical advantage could lead to a statu quo and the possibility for Janet Yellen to remain president of the board.
With Fischer’s resignation the balance changes with now 4 seats that are unoccupied. On these 4, one has already been appointed by Donald Trump. Randal Quarles a private banker will replace Daniel Tarullo but he has yet to be confirmed by the Congress.
Who will be the next three? And who will be the next Fed’s president? Before Fischer’s resignation it could have been Yellen but we cannot expect this conclusion now.
4 types of risks
1 – If the Fed’s members appointments mimic what’s happening in the current Trump administration we can expect that many of these vacant seats will remain vacant. In many ministers, many jobs with high responsibility have not been filled yet. It would be problematic for the monetary policy management and the credibility of the US central bank.
2 – Will the next president be an economist as it is the rule? Jimmy Carter in 1978 named a non economist and it was a nightmare.
3 – There is not a lot of talented economists who claim for the job. It’s annoying for the quality of the board, the monetary policy management and the prospects for the US economy.
4 – With this new equilibrium and a Congress with a republican majority there is a risk on the independence of the Fed. Many reports from the republican side have asked for a Fed following a monetary policy rule (a Taylor rule type). Following such a rule would limit the capacity of judgement of the US central bank and its independence as it will have to follow the rule.
Fischer’s resignation can be a game changer on monetary policy at a moment where the US economic policy is just monetary policy.
This graph illustrates an article by David Leonhardt (NY Times) on the US income distribution.
It shows how the income distribution has changed between 1980 and 2014.
In 1980, there was a catch-up effect for low incomes. Their growth rate was higher than the average and higher than high incomes. For the lowest 20%, the 1980 income growth was higher than the average (2.5% inflation adjusted growth)
In 2014, every percentile has an income growth that is lower than percentiles higher on the distribution. There is no more catch-up but divergence.
For the highest 20%, the 2014 income growth was higher than the average (1.4% inflation adjusted growth).
The proposal made by Donald Trump and the Republicans to lower tax rates would accentuate the divergence of the income distribution. It would be negative for the economy.
« Most Americans would look at these charts and conclude that inequality is out of control. The president, on the other hand, seems to think that inequality isn’t big enough. »