Overseas Headlines- March 25, 2019

United States:

Fed Policy ‘About Right’ After Pivot, Economists Say

The Federal Reserve is getting monetary policy “about right” after pivoting in recent weeks to a decidedly more dovish posture than at the end of 2018, according to a plurality of economists surveyed by Bloomberg. Just under half of all respondents to a March 21-22 questionnaire expressed approval of the Fed’s outlook for interest rates; 37 percent said the Fed was too dovish, while 14 percent said policy makers were too hawkish. The Federal Open Market Committee last week signaled that policy makers are unlikely to raise rates at all this year, compared to the two 2019 hikes officials foresaw in December. Only part of that downgrade was anticipated, and Chairman Jerome Powell went further in his March 20 post-FOMC meeting press conference, calling too-low inflation “one of the major challenges of our time.’’ Slightly more than half of economists surveyed said they’d downgraded their expectations for interest-rate increases this year after the FOMC meeting. Of the 37 polled, 20 now believe the fed is done raising rates in this cycle. Asked whether President Donald Trump had influenced the Fed’s shift in tone by criticizing their four 2018 rate hikes, 75 percent said it had no effect while 25 percent said it had “some” impact. The president publicly criticized the Fed for raising rates last year via Twitter and in interviews. Bloomberg News reported that at one point he discussed firing Powell as his frustration with the central bank chief intensified after it hiked again in December. Stephen Moore, picked by Trump on Friday to be governor on the Fed board — subject to Senate confirmation — said in an interview on Bloomberg Television following the news of his selection that the December move had been a “very substantial mistake.”



IMF Says Euro-Area Economy Is Vulnerable When Downturn Strikes

Europe’s economy is facing growing risks, from protectionism to Brexit, and needs to do more to be ready for the next slump, according to IMF First Deputy Managing Director David Lipton. Lipton told an audience in Lisbon that Europe “must overcome the policy shortcomings that could exacerbate the next downturn — whenever it eventually comes.” He singled out Italy for its “glaring vulnerabilities,” which have left it ill-prepared. The euro area’s third-largest economy has slipped into recession and may have contracted again this quarter. “While most baseline forecasts show some recovery ahead for Europe, many have been surprised by the size and pace of the recent deceleration,” Lipton said in the speech on Monday. “So, it is important to acknowledge the continuing uncertainty about the coming year, including with the crucial issue of Brexit still unresolved.” Lipton, whose checklist includes more integration of fiscal policy and banking supervision, also said U.S.-China trade tensions pose the largest risk to global stability. The International Monetary Fund official warned that Europe may not be able to rely on the tools used to fight the 2008 financial crisis because central banks have little-to-no-room for stimulus and most governments are already saddled with high debt. There may also be “political resistance” to more bailouts because of accusations that the burden of the last recession fell unevenly on society.



Economists Split on South Africa Avoiding Moody’s Negative Cut

South Africa may just be able to cling onto the stable outlook of its sole investment-grade rating this week, helping it stay clear of a forced selloff of billions of rand of its debt. Economists are divided on what Moody’s Investors Service will do when it potentially makes an announcement on South Africa’s credit assessment Friday. Half the participants in a Bloomberg survey expect it to maintain a stable outlook on its local- and foreign-currency debt, with the remainder predicting a reduction to negative. Many of those who foresee no change say there may be a move after the May 8 general election. The deepest power cuts in more than a decade by cash-strapped, state-owned company Eskom Holdings SOC Ltd. are hurting efforts by the continent’s most-industrialized economy to recover from last year’s recession. The budget deficit will probably widen to the worst in 10 years as declining tax revenue and bailouts for underperforming government firms weigh on public finances, dimming hopes that the country will hold on to the stable assessment from Moody’s. “I’m actually surprised that they’ve spared us this long,” said Lullu Krugel, the chief economist at PwC. “My call is that it is time. If I were them, I would pull the trigger” on the rating, she said. A cut wouldn’t be “the end of the world” because that’s already priced into assets, and while new debt would be more expensive, local equity markets could become even more attractive, Krugel said. While Moody’s is scheduled to decide on South Africa’s assessment this week, it may end up only issuing a research report without a ratings action, or nothing at all. A reduction in the outlook tends to precede a cut in the actual rating.