The Fed's gradual "taper" of its quantitative easing program seems to be going well. This week the FOMC decided to reduce its monthly bond purchases by a further $10 billion, to $35 billion, down from a peak of $85 billion. Fed Chair Janet Yellen stressed that the Fed intended to keep interest rates steady for some time even after the QE purchases stop altogether, which implies that no increase is likely until well into 2015.
There have been some signs of higher inflation lately, but Yellen characterized these as "noisy". This is not a term I recall from my economics texts, but it implies that the Fed believes the price pressures are one-offs, related to events like the Iraq crisis and last winter's severe weather. This always makes me nervous -- price pressures are always one-offs, until suddenly they're not -- but markets are certainly reassured. It's remarkable to see US equities close to all-time highs as geopolitical headwinds continue to strengthen, though perhaps this is an indication of the degree to which the US has managed to reduce its dependence on imported energy.
The Fed's plan of inaction is certainly good news for Bank of Canada Governor Stephen Poloz. With the Canadian economy lacking much in the way of forward momentum, he is most reluctant to do anything to tighten the monetary screws. Inflation has moved up remarkably quickly in recent months, all the way to the Bank's 2 percent target*, but like the Fed, the Bank appears to see this as a response to transient pressures rather than a dangerous new trend. In addition, housing prices remain uncomfortably high in many areas of the country, a vulnerability that the OECD called attention to just last week., However, it seems likely that policy steps to address this would be more likely to involve pressure on the banks to cut lending, rather than any moves on the rate front. As long as the Fed stays its hand, the Bank of Canada will be able to do the same.
Things are rather different over in London, where Bank of England Governor Mark Carney is setting the stage for an early rise in rates. It may be that there's nobody more surprised by this than Carney himself. He only arrived on Threadneedle Street a year ago, and promptly issued "guidance" to the market that policy settings were likely to remain accommodative for a long time to come. In the event, the economy (particularly employment, which was the focus of Carney's guidance) has performed more strongly than anticipated, and house prices continue to reach stratospheric levels, especially in central London. Last week Carney told a City audience that rates were likely to rise rather sooner than markets were pricing in; a rate move by the end of this year seems all but certain.
In London, Ottawa and Washington, there's not much doubt that the next rate move will be upwards: only the timing is uncertain. Things are, however, much different at ECB headquarters in Frankfurt. Growth in the Eurozone is somewhere between tepid and non-existent, and inflation is down to 0.5%, far below the bank's 2 percent target -- and some member countries are already experiencing disinflation. The European rate cycle is totally out of synch with the rest of the world, with the ECB's unprecedented adoption of a negative interest rate (minus 0.1%) unlikely to be its last.
The fact that conditions in the rest of the world have improved to the point that rate hikes are on the table may be good news for Eurozone growth, especially if the ECB's actions help to keep the Euro relatively weak. The political outlook may be another matter, however: the recent elections for the European Parliament showed a rising level of discontent with the past half-decade of austerity. It may not just be UK voters who get the chance to vote on continued EU membership in the next few years.
*UPDATE, 20 June: And as of May, according to data released today, up to 2.3%. In response, the Canadian dollar has strengthened as markets anticipate that the Bank of Canada will have to hike interest rates, or at least hint at a tightening bias. I have my doubts: Poloz has sounded ultra-dovish since his first day in the job.
No comments:
Post a Comment