Fed Signals a Year of Patience Is Ahead With a Grab Bag of Growth Risks
Federal Reserve officials signaled on Wednesday they’re prepared to move interest rates higher or lower as needed, but an unusual mix of risks means they could remain on hold all year. Despite an economy that is forecast to grow above trend with low unemployment, policy makers are worried about external drags such as slowing European growth, the potential of a disruptive Brexit and the ongoing Trump trade war. Domestically, they are concerned about an inflation rate that is decelerating despite a labor market that is below their estimates of full employment. The result is an interest rate policy that is on hold and might remain so even if some of these risks resolve into a more optimistic outlook. That’s basically the message in the minutes of the Federal Open Market Committee’s March 19-20 policy meeting released in Washington. “The bar is high on moving up or down from here,’’ said Laura Rosner, senior economist at MacroPolicy Perspectives LLC in New York. “They don’t want to be boxed in, but the reality is they are unlikely to shift their stance.’’ Central bankers tried to signal they had options, saying in the minutes that several participants’ views on the policy rate “could shift in either direction based on incoming data and other developments.’’ At the same time, however, they said a “majority” of officials expected the economic outlook and risks “would likely warrant leaving the target range unchanged for the remainder of the year,” the minutes stated. Central bankers left the target policy rate in a range of 2.25 percent to 2.5 percent last month, and wrote down a median estimate for no hikes for the remainder of 2019. Officials held a discussion about why inflation remains so low despite an unemployment rate of 3.8 percent in March. They wondered if labor markets had even more slack or if the public’s expectations about prices were undershooting their target of 2 percent per year. “The discussion around inflation is still slightly downbeat,’’ said Michael Hanson, chief U.S. macro strategist at TD Securities in New York. He added that the committee appears so concerned about the unresponsiveness of prices, that they might not raise the policy rate if inflation moved back to target as downside risks faded. “It is a close call,’’ Hanson said. Price gains, according to the Fed’s preferred measure minus food and energy, decelerated to 1.8 percent in January from 2 percent in December. A Labor Department report earlier Wednesday showed a separate measure of core inflation unexpectedly slowed in March, potentially because a change in data collection may have pushed down apparel prices.
House Prices in London, Southeast U.K. Forecast to Keep Falling
The Brexit gloom hanging over the U.K. property market showed no signs of letting up in March, with real-estate agents expecting house prices in London and southeast England to continue falling for another year. Britain’s tortured departure from the European Union was widely cited in the latest survey from the Royal Institution of Chartered Surveyors, which painted a picture of anxious buyers, reluctant sellers and agents struggling to negotiate agreements. Demand and supply declined, the report published Thursday found, and an index of prices remained deep in negative territory — pointing to “modest” losses over the next two quarters. A subsequent recovery is expected to elude London and the southeast, where the market is in its worst slump since the financial crisis. “Brexit remains a major drag on activity in the market, with anecdotal evidence pointing to potential buyers being reluctant to commit in the face of the heightened sense of uncertainty,” said Simon Rubinsohn, chief economist at RICS. “Whether any deal provides the shift in mood music envisaged by many respondents to the survey remains to be seen, but as things stand there is little encouragement to be drawn from key RICS lead indicators.” With Prime Minister Theresa May unable to win a parliamentary majority for her Brexit deal, the EU has offered Britain a delay to its departure from the bloc until the end of October. The new deadline risks months more of uncertainty for businesses and consumers.
Air Freight Decline Adds to Warning Lights for Europe’s Economy
Air-freight movements in Europe are declining at the fastest pace in six years, joining a host of indicators that have raised concern about the economic outlook. At airports in the region, air-cargo volumes fell 3.3 percent in February, data by Airports Council International Europe show. That’s the fourth consecutive decline and the worst reading since 2013. While falling cargo volumes hit at a lack of confidence and demand across the economy, the key question for European Central Bank policy makers meeting in Frankfurt on Wednesday is whether this will be temporary or a more sustained slowdown. The U.S. is threatening new tariffs on imports from the European Union, and the IMF on Tuesday cut its global growth forecast again. In Germany, Europe’s largest economy and its biggest exporter, the picture is also turning more gloomy. February saw the country’s top four airports by freight, where more than 90 percent of the country’s air cargo is handled, all post declining volumes. German industry is in a deep slump, with the factory Purchasing Managers Index at the lowest in more than six years. The German freight data excludes air traffic in transit that’s not destined for the country or doesn’t originate there.
China Consumer Inflation Surge Seen as Unlikely to Shift PBOC
China’s consumer prices surged on the back of temporary food supply factors, while factory inflation provided further evidence of a nascent economic recovery. Consumer inflation accelerated to 2.3 percent in March from a year earlier, up from 1.5 percent in February and posting the biggest jump in more than a year. The surge was mostly led by rising vegetable and pork prices, which drove the CPI up by more than half a percentage point, according to the National Bureau of Statistics. Core consumer prices, excluding food and energy, stayed flat at 1.8 percent, and factory inflation halted a dis-inflationary slide, gaining 0.4 percent. Because the inflation rebound was driven by food-price increases that may prove temporary, the central bank is unlikely to abandon its policy of keeping cheap money flowing to the private sector for now. Lingering deflation risks and uncertainties over the trade war and the sustainability of the economic upswing also argue for caution. “Monetary policy won’t make adjustments, and overall inflation won’t be a big issue for this year” because core inflation remains steady and factory-gate prices will stay at a low level going forward, said Ding Shuang, chief China and North Asia economist at Standard Chartered Bank Ltd. in Hong Kong. The People’s Bank of China is likely in an “observation window” at the moment. Pork prices, a key element in the country’s CPI basket, rose 5.1 percent in March, the first increase after 25 months of decline. That alone drove the CPI to rise 0.12 percentage point, the NBS said in a statement. Over a million hogs were culled in an outbreak of African swine fever and pig feed output has dropped. Rebounding factory prices signal a further firming in the nascent economic recovery, which if sustained give firms greater pricing power, aid profits and the help them repay their debts. “The PBOC still have good reasons to cut reserve-requirement ratios again because there’ll be tax collection and maturing medium-term lending soon,” Ding from the Standard Chartered Bank Ltd said. “Even if there’ll be policy shifts, it probably won’t come from monetary policy as it’s never been very loose”, he said, adding the pace of fiscal expenditure can slow down to save some bullets, if the economy does turn around. The outlook for producer-price inflation is still modest. The PPI index will likely grow by just 0.3 percent in 2019, according to the median estimate of 15 economists in a Bloomberg survey, down from a forecast of 0.8 percent in February.
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