Is Carney an unreliable boyfriend – or just sensitive?

It all seemed a lot clearer in February. At the publication of its economic health check three months ago, the Bank gave a clear signal that interest rates would rise rather more quickly than expected.

Global growth was strong and the UK economy was caught in its positive tailwind.

Real incomes were starting to rise and inflation was still stubbornly above the 2% target.

Commentators started talking confidently of a rate rise this month and another one in the autumn.

The markets were so bullish they priced in a 90% probability of a hike before today was out. All such talk has withered.

Interest rates will remain at 0.5%.

Bounce back

Today the Bank struck a much more doveish note on the future path of interest rate rises – a doveish note first revealed by Mark Carney, the Governor, in his BBC interview last month.

The judgement has to be now that the next interest rate increase – unless there is a strong bounce back in the economy or inflation starts rising substantially again – will be far later this year.

The why is clear.

The economy took a major pounding in the first three months of 2018, with growth falling to 0.1% – well below the Bank’s own February forecast of 0.4%.

Although the Bank says that growth for the rest of the year will be stronger, that first quarter figure has led to a significant downgrade in the overall economic forecast for 2018.

Some of that is down to the poor weather, with the Bank being more aggressive about the negative effects of the Beast from the East (“a significant driver of reduced activity”) than the Office for National Statistics.

Then there are the “exceptional circumstances” of Brexit – which the Bank says it has to keep constantly in mind.

Global growth has also eased slightly and there is some evidence of declining consumer confidence alongside a softer housing market.

All in all, the Bank has become more cautious about the performance of the economy.

Consumer confidence

Yes, employment levels remain strong.

Incomes are rising slightly faster than inflation.

And the Bank does expect growth to bounce back over the rest of the year – alongside inflation falling more rapidly than expected over the next two years.

But there are just too many erratic’s for the Monetary Policy Committee to feel confident that now is the time to raise rates.

How will the increase in oil prices following America’s decision to pull out of the Iranian nuclear agreement affect inflation?

Will that miserable Q1 growth figure be revised upwards, as Q1 figures have been in the past, particularly those affected by the weather?

Will consumer confidence return?

Will there be a major Brexit break-through?

The critics might gather.

Wait and see

Is Mr Carney revealing once again his “unreliable boyfriend” tendencies, promising that interest rate rises are just around the corner, only to pull back?

He might suggest that he and the other eight members of the MPC are less the unreliable partners, more the “sensitive” listeners.

Sensitive to changes in the data which effect a decision based on fine margins and delicate judgements.

It was John Maynard Keynes who said that when the facts changed, so, sir, did he.

Today the Bank has changed tone.

Let’s wait and see, it is saying.

Let’s wait and see how the economy develops until we give any firm guidance on the path of interest rates beyond the Bank’s often used formulation of some limited rises “over the forecast period” of the next three years.

Yes, they will rise at some point.

But the chances of that happening sooner rather than later has receded.


 

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Author Kamal Ahmed 
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Fed Minutes Signal Greater Confidence in Reaching 2% Inflation

Central bankers at last month’s policy meeting believed the economy would run hot for the next few years

Federal Reserve officials at their meeting last month expressed greater confidence inflation would rise to their 2% target over the coming year, a development that could affect how much they raise interest rates in coming years.

They also debated the costs and benefits of allowing the economy to run hot and discussed how they might need to later raise rates to a level that would deliberately slow growth, according to minutes of their March 20-21 meeting, which were released Wednesday.

The minutes highlight just how much Fed officials’ outlook has changed since last fall, when surprisingly slow inflation raised questions about the need for continued rate increases.

Fed officials last month believed the economy would run hot, or grow faster than its sustainable rate, for the next few years, the minutes said.

In March, “all participants agreed that the outlook for the economy beyond the current quarter had strengthened in recent months,” the minutes said. In addition, “all participants expected inflation on a 12-month basis to move up in coming months.”

The outlook has shifted since late last year because Congress and the White House approved tax cuts and a boost in federal government spending for this year and next. The economy hasn’t often had such fiscal stimulus when unemployment is so low.

Last year, falling unemployment supported the case for rate increases. The jobless rate has held at 4.1% since last October, near an 18-year low.

But inflation pressures softened last year, bolstering arguments in favor of slowing the pace of rate rises. At the time, top Fed officials said they expected the slowdown would prove transitory, and inflation pressures have firmed up in recent months.

Officials noted the potential benefits of letting the economy run hot, such as drawing more Americans into the workforce from the sidelines and speeding inflation’s return toward the central bank’s 2% goal. The policy makers also noted potential costs: “An overheated economy could result in significant inflation pressure or lead to financial instability,” the minutes said.

The Fed seeks to keep inflation at 2% because it views that level as consistent with an economy with healthy demand for goods and services.

At the same time, some officials warned they eventually could need to lift rates to a level that would deliberately restrict growth.

Some officials said they might need to acknowledge in future postmeeting policy statements that interest rates eventually would rise from a low level that spurs growth “to being a neutral or restraining factor for economic activity,” the minutes said.

After holding its benchmark federal-funds rate near zero for seven years, the Fed has raised it six times since late 2015, most recently last month to a range between 1.5% and 1.75%. Officials also penciled in two more quarter-percentage-point rate increases in 2018 and three such moves in 2019.

The Fed isn’t likely to raise rates at its next meeting, May 1-2, but investors largely expect another quarter-percentage-point increase at the following meeting in June. Investors have focused more attention on whether the Fed will feel pressure to add a fourth rate increase this year. The answer largely turns on inflation.

Of the 15 Fed officials at March’s meeting, 12 penciled in either three or four rate increases for 2018, and they were equally divided between those two paths. Most officials also penciled in at least three rate increases for 2019.

If Fed officials grow more confident that inflation is rising toward their 2% target over time, they could stick to their tentative plan for three rate increases this year. But if it looks like new federal spending, tax cuts, a weaker dollar and lower unemployment will lead to an acceleration in price pressures, policy makers could act more aggressively.

Consumer prices excluding volatile food and energy items rose 2.1% in March from a year earlier, according to the so-called core consumer-price index, released by the Labor Department Wednesday. That was the strongest reading since February 2017.

Economists at JPMorgan Chase estimate the Fed’s preferred inflation gauge, produced by the Commerce Department, will show annual core inflation of 1.9% in March when it is released later this month. In February, it was 1.6%.

Annual inflation is expected to rise in coming months because the weak monthly readings of last March and April will no longer be included in year-over-year comparisons, the minutes said.

This upturn is “widely expected and, by itself, would not justify a change in the projected path for the federal-funds rate,” the minutes said.

While the minutes show Fed officials are optimistic about economic growth, the prospect of trade fights loomed as one significant concern.

“A strong majority” of Fed officials saw the prospect of retaliatory trade actions by other countries as a risk for the U.S. economy, the minutes said. Officials’ contacts in the agriculture industry reported “feeling particularly vulnerable to retaliation.”

 


Here at Dollar Destruction, we endeavour to bring to you the latest, most important news from around the globe. We scan the web looking for the most valuable content and dish it right up for you! The content of this article was provided by the source referenced. Dollar Destruction does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products or other materials on this page. As always, we encourage you to perform your own research!

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Author: Nick Timiraos 
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