Powell Aims to Dodge Japan Deflation Trap With Dovish Fed Tilt
Almost 40 years after Paul Volcker brought the U.S. economy to its knees to bring inflation down, Federal Reserve Chairman Jerome Powell and his colleagues are on a mission to stoke price pressures and avoid a Japan-like deflationary trap. Declaring that too-low inflation was “one of the major challenges of our time,’’ Powell left open the possibility on Wednesday that the Fed’s next interest-rate move might be a cut after four increases last year. The world’s most powerful monetary policy maker also sketched out a harmful scenario in which consumers and companies lose faith in the Fed’s ability to hit its 2 percent inflation target. “If inflation expectations are below 2 percent, they’re always going to be pulling inflation down and we’re going to be paddling upstream’’ to keep prices up, he told reporters after the Fed unexpectedly scrapped its forecast of any rate hikes this year. That’s the type of situation that Japan fell into two decades ago and with which Europe is flirting now. It’s a path that could ultimately lead to a deflationary downturn as households and businesses put off borrowing and spending today because they’re convinced prices will be lower tomorrow, no matter how far the central bank lowers interest rates. “We are not getting any inflation and the risk is that we find out — as did Europe and Japan — that we are stuck and that the central bank isn’t able to raise inflation,” said Mark Spindel, chief investment officer at Potomac River Capital in Washington. The Fed hasn’t hit 2 percent inflation on a sustained basis since formally adopting that objective in 2012. In December, the personal consumption expenditures price index that the Fed targets rose 1.7 percent from a year earlier. The extra yield investors demand to hold 10-year Treasuries over two-year notes was 13 basis points, highlighting market conviction that inflation will stay subdued over the next decade.
BOE Says More Firms Trigger Brexit Plans as Rate Left Unchanged
The Bank of England said more companies are triggering plans for a no-deal Brexit as it kept policy in a holding pattern while the government takes withdrawal talks to the brink. Around two-thirds of firms surveyed by the central bank said they had started implementing contingencies for a disorderly departure from the European Union. About 80 percent judged themselves ready for such an outcome. With Britain just days away from its scheduled departure date from the EU, the nation’s future relationship with the bloc is as unclear as ever. Prime Minister Theresa May has asked for a short extension of the timeline, but there’s still a risk that the U.K. could leave without a deal, which would threaten chaos in trade and a sharp drop in the pound.“Brexit uncertainties had also continued to weigh on confidence and short-term economic activity,” the minutes of the Monetary Policy Committee meeting said. While many firms said they were prepared for no-deal, “companies had also reported that there were limits to the degree of readiness that was feasible in the face of the range of possible outcomes.” With the cliff-edge so close, the bank’s Monetary Policy Committee, led by Governor Mark Carney, voted 9-0 to hold at 0.75 percent on Thursday, as predicted by all 61 economists in a Bloomberg survey. They signaled they’re in no rush to continue with a series of limited and gradual hikes. The minutes of the meeting reiterated Carney’s line that Brexit could prompt the central bank to move policy in either direction, but several members of the MPC have since said rates would be more likely to go down than up. Michael Saunders, one of the more hawkish members, said this month he’s doesn’t see a need to move again until the uncertainty of Brexit lifts.
Russia Inflation Respite Has Market Seeking Clues on Easing
With the Russian central bank all but certain to hold fire at its interest rate decision on Friday, investors are instead watching closely for any hint from Governor Elvira Nabiullina that the inflation danger from a recent tax hike is over, paving the way for monetary easing. Central bank officials have so far given scant guidance after two surprise rate hikes late last year interrupted nearly four years of monetary easing. But with a spike in inflation likely to be softer than expected and money pouring in to Russian bonds, many economists have switched their bets from another hike to a cut before the year is out. “The central bank may hint at a shift to rate cuts this year,” said Irina Lebedeva, an economist at UralSib investment bank in Moscow. It may start lowering rates “in September, when it’s clear how the harvest is going and what the outlook is like for inflation.” Inflation quickened to 5.2 percent in February, well below the 6 percent level the central bank warned consumer prices could reach by the beginning of the second quarter. A value-added tax increase that kicked in on Jan. 1 didn’t have as big an impact on consumer prices as expected because retailers took most of the blow without raising prices. The inflation outlook also got a boost from an 8.5 percent surge in the ruble this year, the biggest rally in emerging-market currencies. Investors have used a lull in sanctions threats from Washington to scoop up ruble bonds, with a record-high sales volume recorded at weekly auctions this month. The risk of inflation peaking at 6 percent has subsided, Alexey Zabotkin, who heads the regulator’s monetary policy department, said earlier this month, adding that monetary easing may begin as soon as late 2019.
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