I have had the opportunity to discuss with some of my blog readers on what I said on the Fed’s monetary policy and what was said in the last press release (see here).
There are two points to keep in mind
The message from the Fed is that all options are opened and if there is an opportunity in September the FOMC will catch it. It will be mainly dependent on the next two labor market reports. It would reflect the fact that the US central bank would like to gain degrees of freedom in the management of its policy.
The other point is that, except to regain control, there are no reasons to see the Fed hiking its interest rates rapidly. The US economy is not doing that well. GDP trend is just 2.1% at annual rate and inflation rate remains low.
My personal point is that, as the US dollar is expensive, there is no need to change monetary policy rapidly. Moreover I’m not sure that the business cycle is still expanding. (See here)
In analysing the Fed’s behavior we have to disentangle between what we perceive from the Fed and what we think the FOMC has to do. For me there is no ambiguity: the Fed will catch an opportunity in September if it can but I’m not sure that it is the best strategy for the US economy.
The Fed, in its press release, has let open all the options for hiking rates before the end of the year but September is still high on the agenda. The US central bank has reminded us that its decision will be data dependent and that the improvement on the labor market is the kind of data that could accelerate the decision. But on the other side, lower energy price will not hasten the convergence of inflation to the 2% target.
In other words the Fed has noticed that even growth prospects remain moderate there are stronger dynamics than in June on households and on the labor market. Imbalances are still there on the labor market but more limited than in June. Exports and investment are still a drag to a stronger expansion. Continue reading
The current momentum of the world trade, in volume, is worrying me. Comparing May 2015 to May 2014 shows that world trade is growing at a mere O.4%.
For the whole first quarter, compared to the last three months of 2014, world trade has shrunken by -5.1%. For the second quarter the carry over growth at the end of May is negative at -4.25%. This is the second consecutive quarter of decline and that where the problem is.
This weak dynamics in the world trade is not new. Since the end of summer 2011 its yearly growth rate is below the blue band on the graph. This blue band is the average growth from 1992 to 2007 +/- a standard deviation. Before after a shock that pulled it down (red circles on the graph), the world trade recovered rapidly with usually an overshoot before converging to the blue band.
This is no longer the case. After the rapid recovery seen in 2009/2010, the world trade momentum has slowed dramatically, staying below the blue band. It’s a very specific period. We cannot exclude that this could be a by-product of the austerity policies that have been put in place in Europe and that has led to a long recession from mid-2011 to the end of 2013. Continue reading
Let me show you one chart on Chinese growth. It represents contributions to yearly growth by large sectors. Four points to notice
- The contribution from the manufacturing sector is now very limited. It is no longer the backbone of Chinese growth
- The real estate sector has also a minor contribution.
- The Chinese economy has moved to a model that is driven by services. The growth model has been rebalanced from the industry to services
- The finance sector has a robust contribution. But this latter mainly reflects the bubble seen on the equity market. The strong and deep intervention of the Chinese authorities is expected to limit the market fall after the bubble burst. But we cannot anticipate that the finance contribution will remain at this high level.
With a more limited contribution from the finance sector, GDP growth momentum will converge to a lower path. We can expect slower growth in the future.
In other words, growth has been supported by higher indebtedness since 2009 but it’s no more a source of impulse. A large part of this debt had real estate price as collateral. The real estate price fall since 2014 implies that the current mechanism for debt is no longer operational. With this failure, there was a need for a new instrument to support growth.
This has been the equity market where constraints have been reduced by the Chinese authorities (more relaxed rules on margin trading). The consequence was a large bubble that has burst since mid-June. It will no longer be a support for the GDP growth through the finance sector.
Moreover the will to limit the equity market adjustment is probably wrong. After the 1987 market crash on the U.S. market there was a task force who concluded that it was better to let the market to adjust and to converge to its fair value. It’s a way to limit constraints on investors and to ease and to improve resources allocation. These conclusions were right but the Chinese regulation authority is currently doing the contrary. It will be damaging for growth.
Annex – Chinese debt momentum
Maurice Obstfeld will be the next IMF chief economist and economic councillor to Christine Lagarde. He will take the job on September 8. From this date Olivier Blanchard, the current chief economist, will be named senior fellow at the Peterson Institute.
Obstfeld is professor at Berkeley University and was currently member of the Council of Economic Advisers at the White House. He is a real specialist in international economics.
I join his web page at Berkeley. Choose a paper recent or older and you will learn something interesting on the topic.
The political equilibrium in the Eurozone is still fragile regarding the deal with Greece.
Interesting paper on this issue
On vacation until July 27. Not too much posts expected