The much-awaited FOMC meeting is here. Discussions appear to revolve around to main questions. What should the Fed do and what will they do? The two are often confused.
Everyone has an opinion about the former. It is like watching a sporting event. We do not let our lack of experience prevent us from being critical of players or coaches and offering unsolicited advice (even if through a TV) on how to win. What should the coach do?
Seven years ago today, following frenzied weekend meetings, Lehman filed for bankruptcy. It confirmed the end of an era in a way that Bear Stearns demise had only hinted. The world has not been the same since.
After months of hinting at interest rate hikes, many Americans consider the prospect of an increase in the prime rate a certainty. However, the International Monetary Fund (IMF) has warned the world’s largest economies, including the United States, against raising interest rates too soon. According to the IMF, too many risks to global growth remain, and more advanced economies should continue to pursue “growth supportive policies.”
The dovish signals from the ECB failed to offer lasting support for the global capital markets. Asia shares slumped, with the Nikkei falling to new lows since February and taking out the psychologically important 17k level. The MSCI Asia Pacific Index fell 1%. European bourses are off about 1.75%, with all major industry groups under pressures, led by financials.
Conditioning has trained us to be skeptical when someone says this time is different. It often means to justify some excess. However, we still need to be sensitive to changing circumstances and relationships.
There are three ways that this monetary cycle is objectively different then past cycles.
First, the Fed has adopted a target range for Fed funds as opposed to a fixed level target. Second, the central bank pays interest on excess reserves. Third, the size of the Fed’s balance has become a new tool that did not exist previously.
India’s Reserve Bank has been doing a commendable job of maintaining price stability and securing Indian markets from external shocks. But a proposal from the government to remove control of interest rates from the central bank has economists and policy makers divided.
The government had recommended a new Monetary Policy Committee (MPC) of seven members, with four nominated by the government and three by the Reserve Bank of India. The plan calls for the removal of the current veto power of Reserve Bank Governor Raghuram Rajan.
When the men and women of the committee that sets UK interest rates get together these days, they are dealing with a deceptively simple question. Rates will go up, but how far and how fast? Their answer will decide the fate of a fragile recovery.
The UK economy is getting back to normal. Output has overtaken its peak of 2007 and is growing at close to the average pre-crisis rate; unemployment is low, employment is increasing. Real wages and investment have finally begun to improve. There are even signs of a return to productivity growth.
The Federal Reserve could be six weeks away from raising rates. The FOMC statement from the end of last month appeared to have lowered the bar of a move. It called the recent improvement in the labor market as “solid” and wanted to see “some” more.
The Federal Reserve provided limited forward guidance in today’s statement. It said that it “anticipates that it will be appropriate to raise the target range for the Fed funds rate when it has seen some further improvement in the labor market…”
This is the key. There will be two more employment reports before the September FOMC meeting. Given that weekly initial jobless claims have fallen to new lows, momentum in the labor market remains intact. The Fed acknowledged that the underutilization of labor has diminished.
While the markets wait for no man, the FOMC is a different story. Janet Yellen expects to lead the Federal Reserve into taking the first step toward normalizing monetary policy in the coming months. Although the statement she crafts is unlikely to contain an overt signal of a hike at the next FOMC meeting in September, it is expected to acknowledge that the economy is moving toward the central bank’s goals.
