The Bank of Japan is engaged in the most aggressive asset purchases, and yet it has largely failed to lift inflation. National consumer prices for June will report at the end of this week. The headline rate expects to fall to 0.3% year-over-year from 0.5% in May. This would be the smallest increase since June 2013.
The light news stream has spurred some position squaring by short-term momentum traders. This is giving the dollar a somewhat heavier tone, and weighing on European equity markets. European bonds and Treasuries are little changed, though slightly firmer.
The latest Wall Street Journal survey found that 82% of economists expect a Fed hike in September, completely dismissing a July hike, as this Great Graphic illustrates. A December hike is more likely to occur as noted by 15% of the survey participants.
Last month the survey found 72% expected the hike in September, and 9% favored December. None of the respondents thought the Fed would wait until 2016 to raise rates, which is a first for this year’s surveys.
The ECB left policy unchanged. The economic assessment was unchanged, in line with the staff forecasts made last month. The asset purchases continue to go smoothly. Inflation bottomed earlier this year, and it expects to remain low over the next several months before rising later in the year. He saw the recent drop in oil prices as boosting the purchasing power of consumers, but did not link it to new pressure on headline inflation. Both the supply and demand of credit has improved.
At her semiannual report to Congress, Yellen said that the American economy was showing signs of persistent strength. “Prospects are favorable for further improvement in the U.S. labor market and the economy more broadly,” she said, adding that low oil prices and increases in the employment rate were bolstering consumer spending. This rise in aggregate demand, she argued, would make a rise in interest rates appropriate later in the year.
The US dollar remains bid. Yellen’s comments and the Beige Book signal that the Federal Reserve is still on track to raise rates this year. In contrast, as the Draghi will make clear today, the ECB is committed to completing its unorthodox easing.
Yesterday the Bank of Japan trimmed its inflation forecasts. It no longer expects to hit its target until after 2018. Many continue to expect the BOJ to provide more stimuli. Derision met the news that China’s GDP expanded by 7% last quarter. Expect more stimuli from the PBOC.
Those regional Federal Reserve banks that want to hike the discount rate are gradually increasing. Last month, the Richmond Fed joined four other regional Fed banks (Dallas, Kansas City, Philadelphia, and Cleveland).
There is a debate going on about the appropriateness of monetary easing in China. Monetary policy was excessively tight in 2014 but started loosening more meaningfully from late 2014, in an attempt to cushion slowing growth, facilitate rebalancing, support reform, and mitigate financial risk. This shift in policy stance was warranted, desirable and it will serve the economy well in the short and long term.
In a normal review of the US, the IMF recently called on the Federal Reserve to drop its dot-plot tool and replace it with a single staff forecast, like the ECB. We too have been critical of the individual macroeconomic forecasts and appropriate level of Fed funds. We think it is a particularly noisy channel of Fed communication.
In a recent address to the Economic Society of Australia, the Reserve Bank Governor Glenn Stevens hit the nail on the head when he remarked, “monetary policy alone can’t deliver everything we need and expecting too much from it can lead, in time, to much bigger problems.”
What was particularly important in this address was the (implicit) suggestion that the answer goes hand in hand with another question; what should we expect from fiscal policy?
