Approaching a busy junction
When you commute from a suburb to central London, most of the train routes (south and southwest) go through Clapham Junction, the busiest train station in Europe by far. In an average day, the number of trains using the station are more than 180 per hour. The rail infrastructure is owned and maintained by Network Rail but the carriages are operated by different companies, which nearly all commuters complain about.
Anyway, what’s my point? The world economy will arrive at a junction with the U.S. Federal Reserve’s upcoming rate decision, differentiating between Central Bank policies and the protectionism that has spread throughout the world. Trade tensions will continue to dominate worries about the world economy, following U.S. President Trump’s recent decision to impose tariffs on foreign steel and aluminum imports from Mexico, Canada and the European Union. In an unprecedented move, President Trump said the U.S. wouldn’t endorse the final communiqué released at the end of the G7 summit.
While an escalation in trade tensions and further moves of retaliation would have implications for U.S. economic growth prospects, for now, the U.S. Federal Reserve is likely to reflect increased confidence in its baseline forecast and deliver another quarter-point increase in interest rates next week. Beyond that, however, there are a variety of views. Some members have expressed concerns over the resilience of inflation and inflation expectations, which seemingly leave the Fed divided over whether one or two additional interest rate increases will be needed in the second half of the year. Expectations are for an inflation overshoot in the coming months, the size and duration of which could determine how aggressive the pace of U.S. policy tightening will be. The coming week’s inflation print for May is expected to see the headline annual rate accelerate from 2.5 percent to 2.7 percent.
Another point to bear in mind here is that while the international debt market in euros is little more than a third of the size of the U.S., the eurozone could have its own ‘taper tantrum’ moment coming up as the ECB prepares to call time on its net asset purchases next week. Despite the recent slowdown and ongoing uncertainties around Italy, comments from some ECB speakers suggest that they are committed to ending their bond-buying program this year. While more recent surveys of euro-area economic activity have been mixed, there is an expectation that underlying momentum will eventually lead to a more enduring rise in domestic price pressures. With the headline rate likely to accelerate further over the coming months, the ECB is expected to become increasingly confident that inflation will be sustained at its target without unconventional policy stimulus measures.