Fed Sees U.S. Facing “Severe Economic Headwinds”
Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
The U.S. is resisting severe economic headwinds to global markets, according to a new release from the Federal Reserve.
In a public statement, the Fed said they see a “limited impact from global slowdown” on the United States economy, which is seeing steady improvement after its slow recovery from the 2008 global financial crisis. The Federal Reserve Open Market Committee acknowledged that “recent foreign economic developments” were one of many significant “downside risks” currently facing the United States.
The U.S. is resisting severe economic headwinds to global markets, according to a new release from the Federal Reserve.
In a public statement, the Fed said they see a “limited impact from global slowdown” on the United States economy, which is seeing steady improvement after its slow recovery from the 2008 global financial crisis. The Federal Reserve Open Market Committee acknowledged that “recent foreign economic developments” were one of many significant “downside risks” currently facing the United States.
Most notably, Japan’s recent fall into recession combined with lackluster growth in the Eurozone, combined with recessionary conditions in parts of the EU, have indicated that export demand from the United States may remain moribund. Some analysts believe that the U.S. is somewhat insulated from problems abroad, since the majority of American corporate profits rely on domestic demand.
The S&P 500 jumped on the news, erasing most losses that accrued in early hours of trading as pessimism in the technology sector bled into overall equity losses. U.S. Treasury yields briefly fell on the news, and all medium and long-term bond yields remain positive over the past month. The 10-year U.S. Treasury yield rose 16 basis points in the previous month, to 2.35%. The 2-year to 10-year spread has settled at 1.84%.
Moving to Inflation Target
FOMC members strongly hinted that their primary focus in the short term would be disinflation as inflation expectations may falter. The committee said that it “should remain attentive to evidence of a possible downward shift in longer-term inflation expectations,” noting that such an outcome “would be even more worrisome if growth faltered.”
U.S. growth has remained relatively strong after cold weather caused a surprise contraction in the first quarter of 2014, and the FOMC noted that inflation has improved. The members said that they “continued to expect inflation to move back to the committee’s two percent target over the medium term as resource slack diminished in an environment of well-anchored inflation expectations.” The Fed noted a 1.4% rise in consumer prices in September, near the target 2% rate.
The Fed’s focus on resource slack is a sharp reversal from previous meetings, in which the FOMC focused on the labor market. Some analysts believe the Fed will continue to pivot to a focus on inflation if the unemployment rate continues to decline and both CPI and PPI gauges show higher inflation.
While recent evidence suggests that manufacturers and employers are paying higher prices, the gains are modest and largely offset by plunging energy costs. This week, the Bureau of Labor Statistics reported that the producer-price index (PPI) rose 0.2% month-over-month in October after falling in September, while services prices rose 1.6% year-over-year in October.
Economists remain uncertain about the significance of a sluggish PPI. While falling energy costs could encourage more investment in energy-intensive operations, capital expenditures and industrial capacity have remained far below historical norms despite falling energy costs. This trend may indicate that producers remain pessimistic about a spike in aggregate demand growth, so the lower costs are not translating into higher production.
