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

Discussions at a conference in Washington

I was at a conference in Washington during the first week of January. I discussed 3 themes that represent uncertainty in 2017. Here are the main points I discussed.

The first was about interest rates and the possible contagion effect from the US to the Euro Area. Here are the different points I mentioned

The starting point is related to the low momentum seen in world trade. Trade between countries is no longer a source of impulse as it used to be in the past. This means that every country has to generate its own growth. It’s no longer efficient to expect an improvement elsewhere in the world to provoke a stronger growth dynamics. In other words, every country’s growth depends mainly on the strategy that is developed locally. Continue reading

As expected, the Fed’s rate is up by 25 bp

The Federal Reserve has pushed up its main interest rate by 25 bp. The corridor in which the fed funds can fluctuate will now be [0.50 ;  0.75%] instead of [0.25 ; 0.50%]. The last rate change was December 2015. 
For 2017, the median value of the fed funds rate is expected at 1.375% which means 3 rate increases. The same pace is expected for 2018 and 2019 with rate anticipated at 2.125% and 2.875% respectively. 
The long term equilibrium value for the fed funds is marginally higher at 3% versus 2.9% in September. 

The global Fed’s scenario remains weak. The Fed tells us that the business cycle is still consistent with a secular stagnation framework: low growth, low inflation and low interest rates. The economy is not back to its pre-crisis momentum. 
The long term growth rate is just 1.8% unchanged from September forecasts and the inflation rate is expected to converge to 2% in 2018. It’s also its long term value (as in September) 

I was not able to watch the press conference (no connexion for a video in a train even a TGV) but my perception on the future of monetary policy is unchanged from what I said earlier today (see here)

What can be expected from the Fed’s meeting today?

The Fed will decide, with a high probability, to increase its main rate by 25 bp at its meeting today. The US central bank has mentioned so many times this hike that it has to do it. It’s a question of credibility.
What will happen in 2017?

My analysis
Monetary policy in the current cycle is the main support for the private domestic demand in order to boost growth. This has always be the case but the current situation is specific for three reasons
1 – The world trade momentum is not strong enough to create an impulse on growth. In the past, this momentum was strong and the impulse associated with it was important as it helped the economy to converge to a higher profile. This was important for Europe.
2 – The low productivity momentum in the US has not allowed for a strong rebound after the last US recession. Therefore the US growth pace is lower than before and its impact on the world economy is weaker
3 – Fiscal policies are neutral since 2014. This highlights the role of the private domestic demand in the current environment Continue reading