A sign of the times when central banks make decisions based upon what is happening elsewhere in the world.
“Fed Worried About Slowing Global Growth in Pausing Rate Increases” read the headlines in the New York Times.
Jim Tankersley begins his article by writing “Federal Reserve officials were worried about slowing economic growth abroad… when they decided in March to pause interest rate increases and cut economic growth forecasts for 2019...”
“Some Fed officials raised concerns that complications with Britain’s withdrawal from the European Union or the Trump administration’s trade talks with China could further hurt growth this year...”
Yes, there were other worries, but the minutes of the Federal Open Market Committee meeting, March 19-20,2019 gave more attention to what was happening elsewhere in the world than usual.
As I have written many times, this expanded world view on the part of the central bank is going to have to be taken into consideration by “Fed watchers” and financial market participants than ever before.
As far as the position of the U.S. economy: “In a news conference after the meeting, the Fed chairman, Jerome H. Powell, called the domestic economy strong’,” although this had to be defined given that the Fed had just revised downwards its growth projections for both 2019 and 2020.
And, in this case, “strong” is a relative term.
Relative to the economy of the eurozone, the United States is doing well.
A “bearish” Mario Draghi, president of the European Central Bank, speaking yesterday, proclaimed, “economic weakness had proved ‘somewhat longer lasting’ than expected, having continued into the early months of this year.”
“Still, he said the chances of a recession ‘remain low’ in a region where falling unemployment and rising wages are expected to prop up demand."
Mr. Draghi reiterated, however, “The European Central Bank is willing and able to act if the eurozone economy remains weak,” and “has signaled, in a move that paves the way for a more radical monetary stimulus later this year.”
And, the market consequences?
“The euro fell on the back of his hints of further stimulus, in which he said that the bank could even tolerate a period of above-target inflation in order to put the economy back on track. The single currency fell against the dollar by as much as 0.4 per cent while he spoke, before rebounding to 0.1 per cent down on the day, while Bund prices rallied.”
This, of course, is where the global aspect of central bank policies is now so important.
Although the Federal Reserve is signaling that it won’t be as aggressive in raising its policy rate of interest this year, the European Central Bank is setting itself up for the possibility that it could move toward “a more radical monetary stimulus later this year” and “could even tolerate a period of above-target inflation.”
This implies that the US dollar could become stronger relative to the Euro and this has implications for trade flows between the two areas, trade flows that could change economic growth outcomes.
President Trump came into office wanting a weaker US dollar. Just after Mr. Trump was elected in November 2016, it took only $1.04 to purchase one Euro. The president’s talk resulted in this price moving up to $1.25 in January 2018, just after Congress passed the Trump tax cuts in December 2017.
Let it be noted that during 2018, the outlook for European growth in 2018 was being revised downwards.
The relative strength of the US economy versus that of the eurozone resulted in the US dollar gaining strength, as the price of one Euro is now around $1.12.
Mr. Trump would still like a weaker US dollar, but how this will fit into what others are doing is a question.
Furthermore, some analysts have fear about “a full-blown trade war between Washington and Brussels after Donald Trump, said on Tuesday he would impose tariffs on $11bn-worth of European products.”
The Dollar/Euro relationship is going to constantly be in the background of policy decisions at the Fed and at the European Central Bank.
It also seems to me that concerns like these will play more and more of a role in the decisions of central banks around the world.
Paul Volcker, former Chairman of the Board of Governors of the Federal Reserve System has called the price of a country’s currency “the most important price” in the country. This is going to become more and more obvious as we move further along into the twenty-first century.
Because of this, a central bank, the Federal Reserve cannot make decisions based only upon just national interests.
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