Fed: The announced normalization

The Fed main interest rate was increased by 25bp at the June meeting of the FOMC. It will now be in the corridor [1; 1.25%]. This is the fourth hike since December 2015 (start of the tightening cycle).
The impact of this monetary policy change has been very limited. The Fed’s communication strategy is to clearly say in advance what it will do. The Fed doesn’t want to create surprises to investors. Therefore investors can adapt their expectations and their portfolios to the new monetary policy stance. The impact of the measure when it is announced is null.
This is interesting notably on emerging markets. In the past, the Fed’s tightening cycle had a strong impact on them as capital flows were back to the US at the expense of emerging countries. Investors were surprised by the Fed’s move. That’s what economists call a sudden stop. Here, no one is surprised so there are no reversal in flows and emerging markets remain strong.

The Fed considers that the economy is now close to full employment (employment rate is 4.3%) and the inflation is close to its 2% target. Therefore it can be rational to increase rates. But as mentioned earlier, the Fed doesn’t want to create too much volatility and to create a persistent shock on the economy. That’s why its measures are announced loudly in advance.  Continue reading

Paris Accord and Fairness for the US

Is the Paris accord on Climate so unfair for the United States? Donald Trump said it was the main reason to exit from it.
Using three different measures Professor Peter Singer shows that the Paris accord was not disadvantageous for the US.
To take just the first of them, Singer says that the US population is 5% of the world population but the gas emission by the US is 15% of the total. It means that current US emissions should be one-third of what they are. Obama commitment was just 27% below 2005 level in 20125. Is it unfair?

Read the article here

Where is the US economic policy?

Donald Trump thought that it was an easy task to replace Obamacare by Trumpcare. It was a mistake and Obamacare will remain the framework for millions of americans. He also said in his campaign that the US trade was a source of concern due to unfair trade agreements. He is currently understanding that it is more complex than expected and we can expect that probably nothing important will change.
There was a risk of trade war with Mexico or with China. It’s no longer the case. The press release of the Trump-Xi Jingping in Florida  doesn’t show the revival of a trade war. It’s just a discussion with concessions made by China to the US. It’s not the beginning of a conflict and the very large Chinese surplus with the US will not disappear in a foreseeable future.
In one word, Trump’s campaign as candidate was based on the repeal of the Obamacare and on the possibility of trade war. Both strategies have already failed in less than 100 days. What will happened then? What could be the credibility of the White House? Who will care? The next 4 years may be very long…

The failure of Trump’s strategy is clearly explained by Paul Krugman in a NY Times op-ed published earlier this month.
During the campaign, Donald Trump talked loudly and often about how he was going to renegotiate America’s “horrible trade deals,” bringing back millions of good jobs. So far, however, nothing has happened. Not only is Trumpist trade policy — Trumptrade? — nowhere to be seen in practice; there isn’t even any indication of what it will involve.”
Continue reading here

Fed and ECB: monetary strategy convergence is not imminent

This is my weekly column for Forbes.fr. You can find the published version here

The current dynamics of monetary policies is fascinating. 
The US central bank, the Federal Reserve or Fed, has just announced implementation at the end of the year of a policy that breaks markedly with its strategy since December 2008. The Fed finally seems to be coming out of the financial crisis that kicked off in 2007/2008. Meanwhile, the European Central Bank (ECB) is sticking to its very accommodative policy on a long-term basis. The Eurozone is unable to let go of the monetary crutches it adopted after the 2008 and 2012 crises.

The two economic giants’ policies diverge in a number of ways: Continue reading

On the US Income Distribution

A  national accounts framework  that can show the income distribution by decile is a priori  fascinating. Piketty, Saez and Zucman have done that for the US. It allows to look at income shares through time. They show that the first 5 déciles share in national income intersects this share of the top 1% in the 90’s. The first five déciles share went from circa 20% in the 70’s to a little more than 12% in 2014. The top 1% has had a profile that mirrored this trajectory from 11% to 20%. 

A comparison of the first five déciles share between the US and France shows that French people have had really a better situation. 

The summary of a detailed document is available here 

The Fed is confident

The Federal Reserve has increased its interest rate by 25bp. The fed fund rate will be in a corridor going from 0.75 to 1%. Previously and since last December Fed’s meeting the corridor was 0.5 to 0.75%.
The US central bank will continue to increase its rate and expects two other increases in 2017 to 1.375% (mid-corridor). Three hikes are expected for 2018 to 2.125% and for 2019 the rate will converge to 3% (which is also the Fed’s long term target). For 2017, there is no acceleration when the profile is compared to what was expected in December.

The Fed perceives the US economy as robust. Yellen said that clearly when she answered a question during the press conference. The US central bank said that its two objectives are almost attained. Growth is robust and the inflation rate is close to 2%. That’s a good reason for the central bank to increase its rate. It’s a new step for normalisation.
Growth and inflation forecasts are unchanged when compared to December. GDP growth is expected at 2.1 in 2017 and 2018 (it was 2% for 2018 in December). The inflation rate is at 1.9% and 2% as is the core inflation rate. These are the same numbers than in December.  Continue reading