Fed rate rise in spotlight
Its actions will be perceived as a reflection of world’s economy resilience
GREECE'S struggles with its euro zone creditors may have grabbed much of the world’s attention, but US Federal Reserve chairwoman Janet Yellen is likely to reclaim the spotlight this week with testimony on a longanticipated shift in policy.
If the Fed sticks to mid-year for its first interest rate rise in a decade, it will be perceived as a reflection of the world economy’s growing resilience.
US core CPI inflation data due on Thursday will also give some idea of just how much the collapse in oil prices which has tamped down inflation globally will work as a counterweight to the Fed’s apparent comfort so far with higher rates in June.
But the fretting over Greece – which makes up less than half of one percent of world GDP – has underscored the impression that for all of the piles of monetary stimulus over the past few years, much of the troubles remain the same.
While purchasing managers’ data for the euro zone during this month are pointing in the right direction, Europe is still struggling to create meaningful growth that would generate the kind of strong hiring that might in turn push up wage inflation.
China is grappling with a property market and debt overhang as it tries to rebalance its slowing economy and a purchasing managers’ index due on Wednesday is expected to show persistent stagnation in its oncebooming manufacturing industry.
Much of Latin America, particularly Brazil, has slipped back even further from a past position of strength and has very little to offer a world economy that the World Bank warns is now running on one engine, made in America.
Minutes to the Fed’s latest policy-setting meeting suggested to some analysts that policymakers might be backing off a June rate rise. But the strongest set of jobs data in many years were published after that late January Fed meeting took place.
“If unemployment keeps falling, the laws of supply and demand have not been repealed, we will get inflation out of this,” said Jim O’Sullivan, chief US economist at High Frequency Economics in Valhalla, New York. “In terms of going to the next step, does that mean they’re tightening in June? Not necessarily,” he said.
O’Sullivan expects Yellen to sound optimistic on the full employment part of the Fed’s dual mandate when she delivers her twice-annual testimony to Congress on monetary policy, starting with the Senate Banking Committee tomorrow.
The majority of forecasters still expect June for lift-off on US rates, and the latest Reuters poll suggested that about twothirds of them had held to the same conviction over the timing over the course of the past month.
What hasn’t been working in the Fed’s favour is evidence that inflation is picking up. Core inflation, which strips out food and energy prices, is expected to hold steady at 1.6 percent when data are due Thursday, according to a Reuters poll.
With a few notable exceptions, like Brazil, inflation has been far too low for comfort, and continues to fall, triggering surprise central bank monetary easings from Canada to Sweden to Australia to Indonesia over the past several weeks.
“The outlook for some large emerging market economies such as Brazil, Mexico and Russia has deteriorated but the meaningful tailwinds of lower energy prices and global policy easing are likely to persist,” wrote Gustavo Reis, global economist at BofA-ML.
Much will depend on whether the euro zone, where some signs of economic revival have drawn stock markets to multi-year peaks, can sail through the latest bout of wrangling over its future without too much damage.
The European Central Bank’s bond purchase programme announced at its January meeting, worth € 60 billion a month, will begin next month, many years behind its peers. But it may have arrived at a particularly good time.
Any risk of investor flight over the outcome of heated negotiations over Greece’s debt burden and the future of the euro now will at least have one of the world’s largest central banks acting as a backstop scooping up sovereign debt.
And the economic news is not all bad. The German Ifo business climate index, due at the start of the week, is expected to rise for a fourth straight month this month. – Reuters