February 22, 2018.
Brighter U.S. Growth Outlook Emboldens Fed on Rate-Hike Course
U.S. central bankers sent a strong message Wednesday that an expansion with “substantial underlying economic momentum” could sustain additional increases in interest rates this year. Federal Reserve officials “anticipated that the rate of economic growth in 2018 would exceed their estimates of its sustainable longer-run pace and that labour market conditions would strengthen further,” the minutes of their Jan. 30-31 meeting released in Washington on Wednesday showed. A number of participants “indicated that they had marked up their forecasts for economic growth in the near term relative to those made for the December meeting.” Their collective position on inflation, meanwhile, remained one of cautious optimism that it will move toward their 2 percent target in the medium term. Stocks reversed gains and bond yields rose after the minutes revealed a more hawkish posture among Fed officials. The S&P 500 Index ended the day down 0.6 percent after being up as much as 1.2 percent earlier. The yield on 10-year Treasuries rose to 2.94 percent — a four-year high — at 4 p.m. in New York. The minutes also marked the end of Chair Janet Yellen’s tenure at the central bank, as she turned the reins over to Jerome Powell in early February. The new chairman appears before the House Financial Services Committee for his semi-annual testimony on Feb. 28, and economic reports since the Federal Open Market Committee last met are unlikely to change the message from the January policy statement that said “further gradual increases” in interest rates are in store for the economy.
Fed’s Quarles Says U.S. Economy in ‘Best Shape’ Since Crisis
Federal Reserve Governor Randal Quarles delivered an upbeat assessment of the U.S. economy and endorsed a “gradual” path for raising interest rates in his first public speech on monetary policy since joining the central bank in October. “The U.S. economy appears to be performing very well and, certainly, is in the best shape that it has been in since the crisis and, by many metrics, since well before the crisis,” Quarles said in prepared remarks Thursday in Tokyo. “With a strong labour market and likely only temporary softness in inflation, I view it as appropriate that monetary policy should continue to be gradually normalized,” he said. The views appear to align Quarles on monetary policy with Fed Chairman Jerome Powell, who testifies next week before Congress for the first time as central bank chief. His comments follow the release of minutes from the Fed’s Jan. 30-31 policy meeting that showed confidence growing among policy makers that growth in 2018 may exceed their December forecasts and justify additional rate hikes this year. Officials have pencilled in three hikes in 2018, according to their median projection released in December. Quarles, who was named to the central bank’s board by President Donald Trump, said recently enacted tax changes and bipartisan budget deals could help sustain the economy’s expansion by increasing demand and spurring business investment. He also drew attention to capital investment data that had already improved in 2017.
U.K. Economy Stays in the Slow Lane as Growth Revised Lower
The U.K. economy expanded less than previously estimated in the fourth quarter as consumers and businesses absorbed faster inflation, keeping the country in the slow lane of global growth. The 0.4 percent expansion — revised down from 0.5 percent — also left full-year growth below the initial estimate. On an annualized basis, the rate was 1.6 percent in the quarter, compared with a 2.6 percent pace in the U.S. Household-spending growth slowed in the fourth quarter, business investment was stagnant and exports fell. The pound fell for a fifth day against the dollar and was down 0.2 percent at $1.3884 as of 11:10 a.m. London time. Gilts were little changed, with the 10-year yield at 1.559 percent. Responding to the detailed report from the Office for National Statistics, John Hawksworth, chief economist at PwC, said the latest numbers don’t change his view and he expects “relatively modest” growth in 2018. At Pantheon Macrcoeconomics, Samuel Tombs said the economy “remains in a fragile state” and stagnant business investment suggests Brexit is “still fostering caution in boardrooms.” Forecasts compiled by Bloomberg show U.K. expansion is expected to be about 1.5 percent this year. That’s below the rates anticipated for the U.S., euro area, Germany and France.
Singapore’s Central Bank Gets a Trigger for Tightening
Singapore’s government may have given the central bank a green light to charge ahead with monetary policy tightening this year. Economists are more confident in their calls that the Monetary Authority of Singapore will exit its neutral stance as soon as the next scheduled decision in April. They’re encouraged after Finance Minister Heng Swee Keat said Monday that the budget position for 2018 will “remain expansionary” as Singapore incurs a small deficit amid greater spending and delayed tax increases. “The impulse to the economy is going to be quite positive” on top of already bright growth and job-market prospects, said Mohamed Faiz Nagutha, an economist at Bank of America Merrill Lynch. “This makes us more confident that MAS will exit its neutral policy in April. We still think it will be very gradual.”