Trump com­pli­cates de­ci­sions on rate pol­icy

Daily Local News (West Chester, PA) - - MARKETPLACE - By David McHugh AP Busi­ness Writer

FRANK­FURT, GER­MANY >> Don­ald Trump’s sur­prise elec­tion vic­tory has helped so­lid­ify ex­pec­ta­tions for an in­ter­est rate in­crease next month by the U.S. Fed­eral Re­serve — but may have com­pli­cated a de­ci­sion for the Euro­pean Cen­tral Bank, which faces a dif­fi­cult choice over more stim­u­lus.

For the ECB, the is­sue is what to do about its bond­buy­ing pro­gram, which pumps new money into Europe’s strug­gling econ­omy each month to try to ac­cel­er­ate growth and in­fla­tion.

The Fed and the ECB — two of the world’s most im­por­tant cen­tral banks — will be mak­ing its pol­icy de­ci­sions be­fore Trump is in­au­gu­rated Jan. 20, while still weigh­ing what he might do as pres­i­dent.

At its meet­ing Dec. 8, the ECB must de­cide whether to keep its money spigot open or slowly start clos­ing it by re­duc­ing, or ta­per­ing, the bond pur­chases. Un­cer­tainty about the poli­cies Trump will pur­sue — and whether, and by how much, they might help spur global growth — has made the ECB’s de­ci­sion more dif­fi­cult. Some an­a­lysts think the ECB will de­cide to ex­tend its bond buy­ing pro­gram by at least six months be­yond its sched­uled end in March.

For the Fed, the ques­tion is whether to fol­low through on ex­pec­ta­tions that it will raise in­ter­est rates when its next pol­icy meet­ing ends Dec. 14. It would be the Fed’s first move since it raised its key short-term rate from a record low late last year, and it would re­flect a strength­ened U.S. econ­omy that is able to ab­sorb higher bor­row­ing rates.

At first, Trump’s vic­tory caught in­vestors off guard and sud­denly in­ten­si­fied un­cer­tainty about how the Fed might re­spond. The still-un­clear de­tails of the pres­i­dent-elect’s eco­nomic pri­or­i­ties added a new con­sid­er­a­tion for the Fed. But in part be­cause of the calm that’s pre­vailed in stock mar­kets since the elec­tion, traders have put the like­li­hood of a rate hike next month at 81 per­cent, ac­cord­ing to the CME Group.

Most in­vestors ex­pect Trump’s ef­forts to stim­u­late the U.S. econ­omy to pro­duce higher debt, higher in­fla­tion and higher rates — all neg­a­tives for bonds. In re­sponse, they’ve been yank­ing money out of bonds, send­ing prices tum­bling and wip­ing out months of gains. The prospect of higher in­fla­tion, in fact, is an­other rea­son the mar­kets ex­pect the Fed to fol­low through on rais­ing rates in De­cem­ber.

Some of Trump’s ideas, such as spend­ing $1 tril­lion on tun­nels, bridges, roads and ports, and re­mov­ing some reg­u­la­tions, could boost growth. Such prospects — un­cer­tain as they are — have al­ready lifted stock prices for com­pa­nies that would ben­e­fit, such as con­struc­tion equip­ment maker Cater­pil­lar.

And if the idea of in­fra­struc­ture spend­ing catches on in Europe, it could help the econ­omy there too, par­tic­u­larly in the 19-coun­try euro­zone. Since the global fi­nan­cial cri­sis, the mone­tary union has fo­cused largely on cut­ting spend­ing. That helps re­duce debt but also puts a brake on eco­nomic growth.

Mem­bers of the euro face rules re­strict­ing debt and deficits. But the will to en­force the rules seems to have weak­ened even be­fore the U.S. elec­tion, with the Euro­pean Com­mis­sion giv­ing Portugal, for ex­am­ple, more time to bring its deficit into com­pli­ance.

The ECB’s stim­u­lus has wide-rang­ing im­pli­ca­tions for in­vestors, savers and com­pa­nies. Ul­tra-low in­ter­est rates — one prod­uct of the stim­u­lus — have re­duced re­turns on sav­ings, pushed in­vestors into riskier mar­kets like stocks and real es­tate, and in­creased pres­sure on pen­sion pro­grams. Low rates have also weak­ened the earn­ings of banks, mak­ing some more hes­i­tant to is­sue loans, which are vi­tal to eco­nomic growth.

The ECB’s de­ci­sion was al­ready com­pli­cated by hav­ing to weigh the ben­e­fits of more stim­u­lus against those side ef­fects. Econ­o­mists Jo­erg Krae­mer and Marco Wag­ner at Com­merzbank are among those who think the ECB will be un­der pres­sure to ex­tend the stim­u­lus. Their rea­son­ing: More and more vot­ers in Europe, too, are turn­ing against the po­lit­i­cal es­tab­lish­ment.

That means the ECB would be left with the bur­den of help­ing the econ­omy through its stim­u­lus pro­grams and low rates, the two wrote in a re­search note.

Oth­ers, like Ben May, an econ­o­mist at Ox­ford Eco­nom­ics, ar­gue that a steady im­prove­ment in the euro­zone econ­omy could lead the ECB to an­nounce a ta­per­ing of its stim­u­lus pro­gram or put off its de­ci­sion for a month. The num­ber of un­em­ployed is steadily fall­ing. In­fla­tion has crept up to 0.5 per­cent in Oc­to­ber, far from the ECB’s goal of just un­der 2 per­cent, but bet­ter than the neg­a­tive read­ings as re­cently as May.

The cal­en­dar of po­lit­i­cal events, how­ever, sug­gests the euro cur­rency union could be in for more shocks.

• A ref­er­en­dum on con­sti­tu­tional changes in Italy on Dec. 4 — four days be­fore the ECB de­ci­sion — could, if re­jected, top­ple the gov­ern­ment.

• A re­peat runoff elec­tion for pres­i­dent of Aus­tria on the same day could bring right-wing pop­ulist Nor­bert Hofer of the Free­dom Party into of­fice.

• Bri­tish Prime Min­is­ter Theresa May wants to start by the end of March the of­fi­cial talks to bring the coun­try out of the Euro­pean Union. Bri­tain is not in the euro, but is a ma­jor trade part­ner, and the talks on its exit could shake con­fi­dence.

• In France, two rounds of vot­ing for pres­i­dent in April and May could see National Front leader Ma­rine Le Pen make the sec­ond round. The National Front wants to leave the Euro­pean Union and re­strict im­mi­gra­tion.

All that un­cer­tainty could de­press busi­ness ac­tiv­ity as peo­ple await the out­come of the votes, says IHS Global In­sight econ­o­mist Howard Archer. He thinks the ECB will ex­tend its 1.74 tril­lion euro ($1.9 tril­lion) bond-buy­ing pro­gram by six months at the cur­rent rate of 80 bil­lion eu­ros a month:

“It makes an al­ready un­cer­tain po­lit­i­cal land­scape for the euro­zone in 2017 look even more un­cer­tain... that could lead to in­creas­ing busi­ness cau­tion and make growth that lit­tle bit more dif­fi­cult.”

THE AS­SO­CI­ATED PRESS

Pres­i­dent-elect Don­ald Trump and House Speaker Paul Ryan of Wis­con­sin pose for pho­tog­ra­phers Thurs­day after a meet­ing in the Speaker’s of­fice on Capi­tol Hill in Wash­ing­ton.

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