The coordinated tightening of global monetary policy continues unabated with the Federal Reserve and the People’s Bank of China both raising interest rates within a matter of hours of each other.
During Fed chairman Jerome Powell’s press conference, he raised the possibility that the Fed might increase their number of media appearances in conjunction with FOMC meetings. Aside from the usual spiel of being ‘committed to communicating policy decisions clearly‘, Powell stressed that markets should not interpret more frequent conferences as a ‘signal of the path of policy‘. Instead, he wants people to believe that further briefings would simply be an expansion of the Fed’s carefully defined methods of communication.
The problem with that is the last six rate hikes (starting in December 2015) have all been delivered in line with the Fed’s ‘Summary of Economic Projections‘, meaning each one was supported by a press conference. When not addressing the media, the Fed has kept policy unchanged. The trend of central banks using press conferences to disseminate policy changes extends also to the Bank of England, who raised rates in November 2017 whilst delivering their quarterly inflation report. When they cut rates in August 2016 following the Brexit vote, this too was communicated via a press conference.
We will wait to see if the Fed introduce more regular briefings into their arsenal. But no one should underestimate just how important communication has become to central banks. Bundesbank chairman Jens Weidmann provided proof of this earlier in the year whilst delivering a speech in Frankfurt:
Large-scale purchases of sovereign bonds are not the only unconventional monetary policy tool used. Communication in general, and forward guidance in particular, is now a monetary policy tool in itself, geared towards the evolution of long-term rates.
Whilst the European Central Bank hold press conferences after each meeting of the governing council, this has never been the practice of the Federal Reserve. Should they adopt a similar method, it would suggest they might be preparing for more regular adaptations to monetary policy. Central banks have successfully been keeping markets and investors on side whilst implementing tightening measures. With the geopolitical climate growing increasingly hostile, banks have been utilising the game of perceptual management. Back in December I debated why they are doing this:
This is one of the reasons why I believe geopolitical stress points such as Brexit and Donald Trump came to fruition – as they gradually begin to unravel and create greater levels of uncertainty in the global economy, central banks will position themselves to be responsive to that uncertainty. They will not be looked upon as a cause of it. This way attention is focused on political division rather than monetary policy.
The actions of the Trump administration and the risks they are perceived to present to the global economy have been highlighted by the think tank Atlantic Council (an organisation that has multiple connections to the Trilateral Commission). CNBC ran an article this week titled, ‘The five biggest geopolitical risks for the rest of 2018‘. To summarise, four of the threats outlined by the Atlantic Council are directly related to Donald Trump. Current central bank policy is, unsurprisingly, not seen as a risk to the economy.
This is a further indication that when the next downturn arrives, eyes will be trained on the White House and not the Federal Reserve and their counterparts.
The Bank of England, meanwhile, have intimated that they will raise rates in two months time, in line with the next inflation report. Brexit remains their primary concern on the UK’s economic outlook. There was also an acknowledgement that the recent fall in inflation from 3% to 2.7% is in part due to the effect of sterling’s depreciation since the EU referendum wearing off. The value of sterling has increased since a transition deal was announced. The BOE mentioned that they expect ‘domestic cost pressures‘ to firm in the upcoming months (supplanting the pound’s depreciation), but that they have ‘generally remained below target-consistent levels‘.
The media have been cultivating the narrative this week of their being light at the end of the Brexit tunnel. The reality remains that a transition deal can only be enacted if there is agreement on ALL aspects of a Brexit deal. Without that, the EU treaties to which the UK is currently bound will cease to apply to Britain at the end of March 2019. In short, a no deal scenario means the UK automatically leaves the EU.
The next and final round of negotiations is on trade, a subject which is of heightened concern globally after Donald Trump announced tariffs on aluminium and steel. He is about to go a stage further by announcing new sanctions against China after the U.S. determined they have been promoting the theft and transfer of intellectual property from American companies. Tariffs between $30 and $60 billion have been mooted, an act that will not go unpunished by the Chinese.
Where a full scale war on trade would leave the UK and the EU in determining a deal is something which has yet to concern the mainstream press. In their minutes for March’s MPC meeting, the Bank of England included the warning that:
A major increase in protectionism worldwide could have a significant negative impact on global growth and put upward pressure on global inflation.
And as we have learnt over the months, rising inflation has been used as a rationale to raise interest rates. If a trade war results in higher inflation and an economic crisis (which it almost certainly would), the global trend points to central banks responding by further tightening policy rather than cutting rates and restarting quantitative easing.
- Developments regarding the United Kingdom’s withdrawal from the European Union – and in particular the reaction of households, businesses and asset prices to them – remain the most significant influence on, and source of uncertainty about, the economic outlook.
- Given the prospect of excess demand over the forecast period, an ongoing tightening of monetary policy over the forecast period will be appropriate to return inflation sustainably to its target at a more conventional horizon.
- Federal Reserve officials, meeting for the first time under Chairman Jerome Powell, raised the benchmark lending rate a quarter-point and forecast a steeper path of hikes in 2019 and 2020, citing an improving economic outlook. Policy makers continued to project a total of three increases this year.
- Powell said he’s “carefully considering” expanding the number of briefings where he explains Fed decision, cautioning that he wanted to be sure that didn’t send any signals about the path of policy.
- The People’s Bank of China has hiked its seven-day interest rate, moving in line with an rate hike by the US Federal Reserve overnight.
- China’s central bank raised its short-term rate – known as reserve repurchase agreements or reserve repos – by 5 basis points to 2.55 per cent from 2.50 per cent.
Reuters: UK wage growth nears two-and-a-half year high, boosting chances of Bank of England rate hike
- British workers’ overall pay rose at the fastest pace in nearly two-and-a-half years over the three months to January, bolstering the chances that the Bank of England will raise borrowing costs in May.
- The Office for National Statistics said workers’ total earnings, including bonuses, rose by an annual 2.8 percent in the three months to January, the biggest increase since the three months to September 2015 and compared with an upwardly revised 2.7 percent rise in the three months to December.
- British inflation was weaker than expected in February as the impact of the 2016 Brexit vote faded, easing some of the squeeze on households’ spending power but doing little to change bets on a Bank of England rate rise in May.
- Official data showed consumer prices rose by an annual 2.7 percent last month, the weakest increase since July of last year and down from a rise of 3.0 percent in January.
- Banks have been warned that British homeowners’ giant mortgages may be affordable now, but could get them into trouble as interest rates rise.
- Officials have put a limit on the proportion of loans banks can give at above 4.5-times income. But increasing numbers of mortgages are being offered at just below that cap.
- Almost 30pc of new mortgages are now given with a loan-to-income ratio of more than 4pc – a record high, in part driven by the need for larger loans to purchase increasingly expensive properties.
- The FPC warned of “some signs of rising domestic risk appetite” in the mortgage and corporate loan markets.
- New Look will close 60 UK stores and cut 1,000 jobs after creditors approved a restructuring plan for the retailer.
- The stores will close within 12 months and some staff may be redeployed.
- The turnaround plan will cut the fashion chain’s rents by between 15% to 55% across its remaining 393 stores.
- European Central Bank policymakers are shifting their debate to the expected path of interest rates as even some of its most dovish rate setters accept that lucrative bond buys should end this year, sources close to the discussion said.
- Policymakers are comfortable with market forecasts, including for a rate hike by mid-2019, and the debate is increasingly about the steepness of the rate path thereafter, as some want future expectations contained given the slow rebound in inflation, five sources with direct knowledge of the discussion told Reuters.
- The ECB declined to comment and the sources said that no decision has been taken on the future of the bond-buying programme.
- China’s portfolio of U.S. bonds, notes and bills sank to $1.17 trillion in January from $1.18 trillion a month earlier, according to Treasury Department data released Thursday. China remains the largest foreign creditor to the U.S., followed by Japan, whose holdings rose for the first month since July, to $1.07 trillion from $1.06 trillion.
- Overall, foreign ownership of Treasuries receded in January for a third straight month, falling to $6.26 trillion, after reaching a record-high $6.32 trillion in October.
- “There is a worry, including in Germany, which I can understand and share, that monetary policy remains the only game in town and that by the next recession monetary policy could be overburdened,” Villeroy de Galhau said.
- The European Council is expected to give the green light to proposals to transform the European Stability Mechanism (ESM) into a European Monetary Fund, similar to the International Monetary Fund (IMF), and to continue the banking union in June. But there are concerns that this timeline might be derailed after the Italian general election led to a hung parliament.
CNBC: Why Italy’s election and opposition in northern Europe could derail Macron’s plan to reform the euro zone
- The pro-European Union (EU) leader, who defeated far-right candidate Marine Le Pen in the last round of France’s 2017 presidential election, has said that Europe should harmonize its tax policies, establish a minimum wage in every country and have a euro zone finance minister and budget — among many other proposals that he says will integrate EU nations further.
- But the rising support for anti-establishment parties across Europe — seen most recently in Italy’s general election — could jeopardize Macron’s proposals.
- You will remember that during the entirety of 2007, the majority of the media, analyst, and economic community were proclaiming continued economic growth into the foreseeable future as there was “no sign of recession.”
- Is there a recession currently? No.
- Will there be a recession in the not so distant future? Absolutely.