There was nothing very surprising about yesterday's FOMC statement, or about the Fed's decision to keep rates on hold for the time being. The fact that the statement portrays monetary policy as still accommodative, and that the Fed expects labour market conditions to tighten and inflation to move closer to 2 percent, suggests that further modest tightening is still on the cards for this year.
However, comments from President Trump and his economic team make things much more complicated. Quite early in the election campaign, indeed before he had even won the GOP nomination, Trump stated that he would likely fire Fed Chair Janet Yellen for the simple reason that she is not a Republican. Now the administration is suggesting that what it sees as a strong US dollar is no longer in America's best interests. This change of stance has led directly to some weakening in the USD against the Euro, but it also sets the stage for a possible clash between the administration and the Fed. If the White House wants a weaker dollar, it is hardly likely to tolerate any further tightening moves, or even hawkish language, on the part of the Federal Reserve.
Uncertainty about the policies of the new administration and about the Fed's next move are, of course, having a direct impact on the Bank of Canada. Despite the threat of US protectionism, the Canadian dollar has held up well since the Presidential election. Both the Bank and the Canadian business community have been generally hopeful about the impact of the new administration's policies. However, if the likelihood of further Fed easing diminishes, the exchange rate is likely to strengthen further, something the Bank of Canada definitely does not wish to see. If that happens, would the Bank be prepared to court the wrath of Trump and his team by easing rates further, a move that might be seen in Washington as currency manipulation?
Things are no simpler across the Atlantic. Bank of England Governor Mark Carney's reputation has suffered from the fact that the UK economy has so far not collapsed in response to the Brexit vote, as the Bank had feared it might. Indeed, the Bank has just revised its growth forecast for 2017 sharply higher. However, the Bank's task is not about to get any easier. This week's passage of the bill that allows the government to trigger Article 50 and start the formal process of leaving the EU removes some of the uncertainty over timing.
Still, the White Paper setting out the government's specific plans for Brexit is not much more than a wish list. It appears that the UK wants to keep many of the economic benefits of EU membership, including a new free trade deal, while reclaiming control over immigration. The EU has explicitly rejected this type of cherry-picking in the past and is unlikely to react positively. The longer the uncertainty over the shape of the final deal persists, the harder Carney's task will be -- and the more likely it will be that his pre-referendum gloom will come to pass.
Lastly we might have a moment of sympathy for the folks running the ECB. As well as contemplating the impact of Brexit, they also have to deal with this year's heavy slate of elections in major EU member states. In both France and Italy, anti-EU parties are likely at the very least to increase their share of the popular vote, while in Germany, Angela Merkel's grip on the Chancellorship has never looked so shaky. Add in the fulminations coming out of Washington about the strength of the dollar, and the task facing the ECB's leadership this year looks truly daunting.
In short, who would want any of these jobs right now, as the global wave of populism continues to build?
No comments:
Post a Comment