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Four factors that determine the Fed’s next move

February 11, 2019 19:55
source: Youcai

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Summary
[Four factors that determine the Fed's next move] The huge changes in the Fed's quantitative signals, coupled with the slowdown in global economic growth, have opened the way for other central banks, including Australia and the Bank of India, to adopt more moderate policies, despite interest rates in most countries. Already at a historical low.

The huge changes in the Fed’s quantitative signals, coupled with the slowdown in global economic growth, have opened the way for other central banks, including Australia and the Bank of India, to adopt more moderate policies, despite the majority of countries.interest rateAlready at a historical low.

The question now is not whether and when the Fed will change its official quantitative policy guidance, but how much it will change the current practice, that is, away from the current path of two interest rate hikes in 2019, and no interest rate hike by 2019.New baseLine, and the risk balance of interest rate cuts in 2020. There are four reasons for its action, although the US may continue to show strong growth and surpass other developed economies.

  *Growth difference*

As the recent World Economic Forum in Davos, Switzerland, shows, the global economic and corporate consensus has clearly turned to the worrying concept of a slowdown. Last year people over-received global economic growth. The concept of synchronous speeding. However, this slowdown is not the most likely outcome in 2019. On the contrary, the world – especially the advanced economies – is facing a period of growth and differentiation in the three largest regions of Europe, China and the United States.

The slowdown in European economic activity, combined with a clear shift in risk balance, will force forecasters to cut their growth expectations, as the European Commission and the Bank of England did last week.

The European Commission cut its forecast for the euro zone's 2019 by 0.6 percentage points, which is a meaningful downward adjustment, including the four largest countries of France, Germany, Italy and Spain. However, some signs of weakness in the European continent that are emerging and deepening indicate that the European Central Bank is about to cut interest rates further. The most likely outcome is that the overall economic growth rate of the euro zone will be less than 1%, while the more vulnerable economies such as Italy will fall into decline.

At the same time, the Bank of England cut its economic growth rate to 1.2% in 2019, which will be the slowest annual growth rate in the past 10 years. Bank of England Governor Mark Carney cited evidence that economic uncertainty has intensified and that investment and consumption have weakened, warning that “the fog of Brexit” is expected to further curb market sentiment, if the UK exits the EU disorderly, short-term downside risks It will even be bigger.

in China,Purchasing manager index(PMIThe continuous decline has continued to show that China’s policy dilemma is growing. reduceDeposit reserveOlder measures such as rate and expansion of targeted loans are not effective in stimulating economic growth, and are more likely to exacerbate financial distortions and misallocation of resources. But in the context of slowing growth, the short-term difficulties of moving more aggressively toward more forward-looking structural reforms have increased.

All this is in stark contrast to the situation in the United States. The January employment report confirmed the continued strength of the labor market, which is the most important driver of consumption and growth. Last month, the results of job creation continued to be significantly stronger than the general expectations. In addition, the annual growth rate of wages remains above 3%. At the same time, corporate investment activities are supported by solid returns, which also indicates the extent to which companies can cope with a more challenging international environment.

If there are no other government policy mistakes such as the government closing again or the Fed’s poor communication again, the US economic growth should remain strong. In fact, the Fed has a reason to raise interest rates, rather than the market's benchmark assumptions, based solely on expected economic performance. But the US central bank will (and should) remain sensitive to the risk of spillovers in the overseas economy, and this consideration will be amplified by the following three factors.

  * Evidence of weak labor market and productivity potential*

In addition to the encouraging pace of job creation, the latest employment report provides the Fed with signs that the labor market is still weak. The direct evidence is that the labor force participation rate has risen further, indicating that more people are likely to re-enter the labor market. Although data on vacancies and claims for unemployment benefits indicate that this is not the case, the relatively stable figures of relatively stable wage growth further prove this. In addition, after years of unusually low growth, there are signs of a rebound in productivity.

  * Moderate inflation*

Don't expect large amounts of liquidity injections from central banks in recent years and extremely lowinterest rateIt will lead to worrying short-term price spikes, which will lead to further interest rate hikes. Structural reforms to the way economic activity continue to deepen, including a major shift in supply responsiveness, will continue to curb inflationary pressures overall. As a baseline forecast, commodity prices should not be expected to be affected, as is the improvement in inventory management and the availability of alternative supplies in certain areas, such as oil.

  * Market interdependence*

The market turmoil in the fourth quarter of last year reminded the Fed that investors' perceptions of less sensitive policy positions could trigger price misalignment of technical assets and increase the risk of polluting the real economy. The consequences go beyond the dramatic turn of the Federal Open Market Committee (FOMC) at the meeting last month, supporting patience and flexibility in raising interest rates and cutting balance sheets.

Federal Reserve Chairman Jerome Powell and his two predecessors are unlikely to show strong preferences – unwilling to deviate largely from market expectations – although some officials may still find it necessary to do so in the future economy Increase policy flexibility while slowing down and reduce the risk of greater volatility in the financial markets in the future.

Technically, these four factors reinforce the view that the Fed is close to or within the economic neutral interest rate (r*). Even if this is not the case, this will be part of the Fed’s current view.

Therefore, it is expected that the Fed’s dot matrix will deviate significantly from the current rate hikes in 2019 and 2020 in March, although they have not yet pointed to a rate cut next year. As Europe and China continue to work towards a more effective growth-enhancing policy stance, this goal will be achieved later – unless the US returns to its own economic trauma or fails to persuade China to make a meaningful difference in trade issues. Concessions, these are contrary to the basic expectations of the market. In that case, the rate cut is likely to come earlier.

(Article source: Youcai)

                (Editor: DF134)

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