Fed Conspiracy Theories See Powell as Fickle Boyfriend, Wise Man
The momentous, mysterious monetary U-turn by Federal Reserve Chairman Jerome Powell and his colleagues this week has spawned a host of conspiracy theories as to what’s really going on at the world’s most powerful central bank. They range from the simple -– the Fed is capitulating to the demands of the financial markets and/or President Donald Trump for a halt in interest rate hikes -– to the more subtle: There’s been a policy regime change at the central bank and it’s now deliberately seeking to push inflation above its 2 percent target. Other possibilities range from the timeworn -– Powell knows something scary about the world economy, of which investors are blissfully unaware -– to the more timely: He has a penchant for wrong-footing financial markets, in both directions. Just six weeks after saying it was on course for “some further gradual increases’’ in rates, the Fed signaled on Wednesday that it was done tightening for now, and left open the possibility that its next move might be a cut. And it did so even though it still believes 2019 will see solid economic growth, a strong jobs market and inflation near its goal. Powell sought to explain the Fed’s pivot by pointing to a panoply of risks: slowing global growth, tighter financial conditions, and various geopolitical fault-lines, including Brexit and U.S.-China trade tensions. The trouble with that account is that all those risks were already in evidence in December, when the Fed hiked rates for the fourth time in 2018 and penciled in two more for this year.
Euro-Area Inflation Slows to Weakest Level Since April
The euro’s area’s inflation rate declined further at the start of the year, though there was a small pickup in an underlying measure. The headline rate fell to 1.4 percent in January, in line with the median estimate of economists, though still the weakest since April. Core inflation rose to 1.1 percent, the highest in three months. The 19-country bloc is in the throes of a slowdown that has the potential to delay ECB policy tightening or even prompt a fresh injection of stimulus. With domestic political tensions and the U.S.-China trade dispute weighing on sentiment, the economy finished off last year with only a meager rise in output. Italy has sunk into recession, forward-looking indicators almost uniformly paint a bleak picture, and Germany, the largest economy, slashed its growth outlook this week. While policy makers halted net asset purchases in December, they’ve committed to keeping borrowing costs at their historic lows through the end of the summer, if not longer, in a bid to push inflation toward their goal of just below 2 percent. “What is next?” ECB President Mario Draghi said last week. “Next will depend on whether we will end up assessing this slower growth, or the factors that have produced this slower growth as persistent.” While risks to the economic outlook have shifted to the downside due to rising protectionism, softer Chinese demand and European politics, officials still consider the chance of a recession as being low. Unemployment continues to decline, pushing up wages and helping domestic demand. While the ECB expects the core rate to increase in the medium term, professional forecasters surveyed by the central bank revised down their estimates.
China Vows to Buy More U.S. Goods, Sees Progress in Trade Talks
China promised to “substantially” expand purchases of U.S. goods after the latest round of trade talks, and both sides planned further discussions to reach a breakthrough with only a month to go before the Trump administration is set to ratchet up tariffs. President Donald Trump said Thursday he will dispatch two of his top negotiators to China following two days of talks with Chinese officials in Washington. Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer will visit the Asian nation in mid-February to hold the next round of talks. The two sides made important progress during talks that were candid, specific, and fruitful, according to a statement published by China’s Xinhua News Agency on Friday. China agreed to increase imports of U.S. agriculture, energy, industrial products and services, it said, without providing details. The countries also agreed to strengthen cooperation on intellecual property rights and technology transfer, Xinhua said. In a statement, the White House didn’t list any new commitments by either side, saying only that progress had been made and “much work remains to be done.” The White House reiterated its threat to raise tariffs by March 1, unless a “satisfactory outcome” is reached. Trump also raised the possibility of a face-to-face meeting with Xi Jinping after receiving an official invitation from the Chinese leader. Earlier, he tweeted that “no final deal will be made until my friend President Xi, and I, meet in the near future.” One possibility would be for a meeting with Xi after the U.S. president’s planned summit with North Korean leader Kim Jong Un in late February.
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