Fed May End Up Seeing 1995-96 Rate Cuts as a Template for Today
As Federal Reserve Chairman Jerome Powell and his colleagues gather this week for a policy making meeting, some of them will likely have 1995 on their mind. That was the year that the Fed initiated a mid-course correction in monetary policy, cutting interest rates after a sustained bout of tightening. Now some officials and investors are beginning to wonder if the Fed will again have to ease its stance after raising rates four times in 2018. “I do see some parallels between the 1995-96 period and what we’re currently in,’’ said David Stockton, who was at the Fed at the time and is now with the Peterson Institute for International Economics. “There’s always some concern that maybe you’ve overdone it’’ after repeatedly raising rates. Powell and his colleagues are widely expected to hold rates steady at their April 30-May 1 meeting. What Fed watchers will be looking for are any hints in the post-meeting statement — or more likely, Powell’s subsequent press conference — that the central bank is teeing up a rate cut for later in the year. “I think they stay on hold here for a long time, but there is a risk that lower inflation does push them to think about easing,’’ said Bruce Kasman, chief economist for JPMorgan Chase & Co. in New York. Fed Vice Chairman Richard Clarida has pointed to 1995 and 1998 as two instances where the central bank reduced rates as insurance against a weakening of the economy, even though it didn’t see a recession lurking. Some Fed watchers think 1995 is the better template for what’s happening now. In 1998, the central bank cut rates three times in rapid-fire succession to short-circuit a financial crisis brought on by the Russian debt default and the near collapse of hedge fund Long Term Capital Management. There’s no such triggering event today. In contrast, there’s a number of parallels between now and 1995-1996. The Fed justified its three rate reductions back then — in July and December 1995 and January 1996 — by pointing to moderating price pressures. Policy makers today are even more fixated on the low level of inflation — and have made no secret of their desire to see it higher.
Europe’s Top Hawks to Hike Rates Despite Global Dovish Turn
Europe’s most hawkish central bank is preparing to raise borrowing costs again, defying a global economic slowdown that’s made most of its peers more cautious. Czech policy makers have held interest rates unchanged for the past three meetings as external risks including Brexit, trade wars, and weakening demand from neighboring Germany overshadowed domestic inflationary pressures. But with worst-case scenarios failing to materialize, most analysts expect the central bank to lift its benchmark a quarter point on Thursday to 2 percent, adding to an unprecedented five hikes last year, the most in Europe. Faster-than-expected inflation, a weak koruna and still-robust economic growth offer enough room for a rate increase, according to Raiffeisenbank AS analyst Eliska Jelinkova. “The rhetoric of the board members, including the traditional doves, is tilting in favor of a hike,” she said. The Czechs stand out as they go against a pullback from tighter monetary policy by central banks around the globe, including the U.S. Federal Reserve and the European Central Bank. Wage growth helped pushed inflation to the highest since 2012, well above the 2 percent target. By contrast, Hungary’s central bank is expected to hold tight after announcing a cautious mix of tightening measures in March. Board member Tomas Holub said in an interview this month that he preferred a hike in the first half of the year. Vice Governor Marek Mora told Reuters he was ready to back an increase if it’s supported by fresh staff forecasts. Still, forward-rate agreements, which are used to hedge against future changes of borrowing costs, show money-market investors remain split between those expecting the central bank to act on Thursday and those betting on a hold. By contrast, a Bloomberg survey shows only three out of 19 economists expect the benchmark to stay at 1.75 percent this week, with the rest predicting an increase to 2 percent. “Holub, who has very probably already seen the new forecast, is trying to direct the market in the correct direction towards a May hike,” Societe Generale SA economists Viktor Zeisel and Jaroslaw Janecki wrote in a report. “Also, Vice Governor Mora sounded more hawkish than usual.”
China’s Recovery Still Relies on Stimulus as Outlook Upgraded
China’s economic recovery continued this month, underpinned by expansive fiscal policy as investors await a potential resolution of the trade war with the U.S. That’s according to a Bloomberg Economics gauge aggregating the earliest available indicators on market sentiment and business conditions. Although stocks weakened in the second half of April, the big gains since the start of the year kept the three-month weighted average positive. Copper prices, sales managers and smaller enterprises reported weaker readings. After a stronger-than-expected rebound in March, policy makers have signaled they are shifting away from broad monetary easing while maintaining supportive fiscal policy. The impact of sustained policy stimulus, plus heightened expectations for a deal that would end the trade battle with the U.S., have bolstered confidence even as downward pressures remain. “Policy support is still necessary — that means the government needs to keep spending and drive investment to keep domestic demand stable,” Bloomberg China economist Qian Wan said. “There is no improvement on the production side from the previous month.” Economists surveyed by Bloomberg have upgraded their forecasts for gross domestic product growth in 2019, as policy feeds through into an improved outlook for businesses and households. The economy will expand by 6.3 percent in 2019, according to the median of 67 replies in the survey, up 0.1 percentage point from the previous result. Analysts also upgraded their expectation for average inflation this year to 2.1 percent, a rate still in line with the government’s target despite the food-price gains driven by a major outbreak of African swine fever. Better sentiment is being tested though, after top leaders signaled less stimulus ahead as the economy recovers. U.S. trade negotiators are due back in Beijing this week to push forward talks on ending the year-long tariff war. Despite the easing of trade tensions, external demand remains a significant risk. Outbound shipments from South Korea — a major supplier of components to Chinese assemblers of electronics such as iPhones — fell 8.7 percent from a year earlier in the first 20 days of the month, dropping for a fourth month.
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