Central banks continued this week on the path to ‘normalise‘ monetary policy, first with the Federal Reserve raising interest rates to 2%, then with the European Central Bank announcing the end of quantitative easing measures beginning in January 2019.
Beginning with the Fed, chairman Jerome Powell confirmed on Wednesday that as of next year he will give a news conference after each FOMC Meeting. Powell first raised the prospect of this three months ago. As discussed in previous updates, each of the Fed’s last seven rate hikes have coincided with a press conference. This ties in with communication from central banks in general becoming ‘a monetary policy tool in itself‘ following 2008.
Whilst Powell stated that a conference after every meeting ‘does not signal anything about the timing or pace of future interest rate changes‘, what it does signal is that all meetings next year are ‘live‘ meetings. Hypothetically, if the Fed were to raise rates more often in 2019, Powell would have the ability to personally detail the reasoning behind each move and maintain the trend of communication being a primary tool in the Fed’s arsenal.
With Donald Trump pressing on with more trade tariffs against China, and the IMF sending out a new warning of how the ‘rules-based trade system‘ could be in jeopardy as a result, the narrative is building for inflationary pressures to build within the U.S. economy, giving the Fed license to continue raising rates off the back of decisions emanating from the White House. In such a scenario, it is ‘Trump’s tariffs‘ which will be scrutinised, not the actions of the Federal Reserve and their quest to pull support from the economy.
Aside from increased press conferences, the Fed are now signalling two further rate hikes this year (in September and December), whereas beforehand markets were expecting only one more to follow. The ‘hawkish‘ stance of the Fed is showing no signs of abating. They will also press on with the roll off of assets from their balance sheet, as their communications throughout 2018 have been indicating.
Meanwhile, the ECB have announced they will cease their asset purchase programme starting in January next year with interest rate rises to follow. During his address to the media, chairman Mario Draghi said that GDP growth for the Euro Area had been revised down for 2018, but most importantly raised the prospect of economic instability on the horizon:
Uncertainties related to global factors, including the threat of increased protectionism have become more prominent. Moreover, the risk of persistant, heightened market volatility warrants monitoring.
Yet, the ECB are pressing ahead with plans to withdraw support from markets, using the vehicle of gradualism that fellow central banks have also adopted. The ‘protectionism‘ Draghi refers to is two fold – trade tariffs levied against the EU by the Trump administration, and the rise of ‘populism‘ in Italy. Both have the capacity to increase the risk of heightened inflation and currency devaluation. The fact that Italy is the third largest economy in the Euro Zone and carrying over €3 trillion in debt presents an obvious danger.
It seems logical to assume that the ECB will enter a cycle of increased monetary tightening amidst a growing swathe of economic instability. As with the Federal Reserve, protectionism and populism stand to be held up as the necessary scapegoats to deflect attention away from central banks.
- The European Central Bank has shrugged off evidence of a slowdown in the eurozone and announced that it will phase out the stimulus provided by its massive three-year bond-buying programme to the eurozone economy by the end of the year.
- Despite warning that the single currency area was going through a soft patch at a time when protectionist risks were rising, the ECB said it would wind down its bond purchases over the next six months.
- Federal Reserve Chairman Jerome Powell will become more of a presence to investors starting in January 2019, when he begins holding news conferences after every central bank meeting.
- Powell made the announcement Wednesday, after the conclusion of the policymaking Federal Open Market Committee’s two-day meeting.
- “Having twice as many press conferences does not signal anything about the timing or pace of future interest rate changes,” he said. “This is only about improving communication.”
- British inflation held at a one-year low in May despite a jump in fuel prices, leaving the chances of a Bank of England interest rate hike over the coming months finely balanced.
- Consumer price inflation remained at 2.4 percent in May, its joint lowest annual rate since March 2017, the Office for National Statistics said on Wednesday. Economists had forecast 2.5 percent inflation in a Reuters poll.
- British factories had their worst month in five-and-a-half years in April, suggesting the economy’s weak start to 2018 has persisted and lowering the likelihood of the Bank of England raising interest rates again any time soon.
- Manufacturing output dropped by 1.4 percent in April after a 0.1 percent decline in March, the biggest month-on-month fall since October 2012, the ONS said.
- UK retail sales soared for the second month in row in May, beating expectations, thanks to the royal wedding and warmer weather.
- The Office for National Statistics (ONS) said retail sales volumes in the month rose by 1.3%, after they rose a revised 1.8% in April.
- N Brown, the company that owns Simply Be and Jacamo, is considering closing its remaining shops and becoming an online-only retailer as it suffers from declining footfall on the high street.
- The move will affect the retailer’s 20 stores and put 270 jobs at risk. N Brown said it expects consultations with staff to be completed by October.
- British wage growth remains sluggish despite another surge in job creation, official data showed on Tuesday, leaving the Bank of England still waiting for a clear sign that the economy is ready for higher interest rates.
- Tuesday’s figures showed pay growth excluding bonuses in the three months to April fell for the first time in more than a year, rising by 2.8 percent year-on-year against expectations in a Reuters poll for growth to hold at 2.9 percent.
- U.S. inflation accelerated in May to the fastest pace in more than six years, reinforcing the Federal Reserve’s outlook for gradual interest-rate hikes while eroding wage gains that remain relatively tepid despite an 18-year low in unemployment.
- The consumer price index rose 0.2 percent from the previous month and 2.8 percent from a year earlier, matching estimates, a Labor Department report showed Tuesday. The annual gain was the biggest since February 2012 and follows a 2.5 percent increase in April.