I'm typing this post with a case of strep throat, so forgive me if my thoughts seem a bit disjointed or otherwise incomprehensible at times. It just so happens that this past weekend was the much-anticipated Oklahoma vs Ohio State football game, which I had the honor to attend. While the main show was indeed the football game, a number of other factors played an equally important role in the experience. This included nearly coming to blows with a very drunken fellow student, an intense storm just prior to the game's original start time, among other things. This week, while central bank decisions are taking center stage, there are a number of factors working on the exterior of the stage still playing a big role in our current economy.
Let's begin with the latest FOMC forecast for the long-term.
The infamous dot plot above shows many FOMC members wishing to hike the benchmark interest rate from 0.25-0.50 percentage points to an average 1.25-or-so percentage point interest rate in 2017, a rather ambitious goal given the global struggles to see stronger economic growth. By 2019, most FOMC members would prefer to see the benchmark interest rate somewhere around 2.50 percentage points, again a rather ambitious outlook and one I'm personally wary of, as we're already in/near year 8 of this economic expansion, making it one of the longest on record. A bull can't run forever.
The vote to maintain the current interest rate of 0.25 to 0.50 percentage points landed at 7-3, a pretty strong signal that some members inside the Fed are getting a little antsy with respect to keeping interest rates low, and I agree. The Fed almost seems scared these days, worried that even a minimal jolt to the economy could bring everything crashing down, and thus the best way to keep things steady is to keep interest rates steady. This mindset has created a whole other level of problems alone, but that's a post for another day.
Another interesting graph from the Fed's decision yesterday, and one of those exterior factors dancing around central banks, was the projected PCE inflation. I don't have my protractor on me at the moment, but that's nearly a 90-degree angle from observed PCE inflation through 2015 to projected PCE inflation through 2016. The FOMC is essentially expecting inflation to reverse course and start chugging its way back up at this very moment in time. Unfortunately, the FOMC is notorious for being too optimistic on the future of the economy, particularly in the current expansion. When accounting for this, it becomes difficult to see a 2% PCE inflation mark earlier than 2018.
The Federal Reserve isn't the only central bank that had their monetary policy meeting this week; the Bank of Japan also met up.
At their previous meeting, the Bank of Japan announced it would re-evaluate its current monetary policy, which set off concerns amongst investors if this was a warning shot, if the BoJ might stop pushing ahead with negative interest rates and QE. This week, the Bank of Japan came out and modified their policy slightly, now to a yield-curve based goal. The BoJ will now aim to keep 10-year Japanese government bonds around 0%, and while this is still very accommodative monetary policy, it's also a cessation that plunging further into negative interest rates right now, when the benefits are beginning to be questioned, is not the right move. It's part of a larger cessation that the Bank of Japan is running out of tools, something we've all known for a while, but no one really knew when the Bank would begin realizing that. One could effectively argue that this realization moment came at their last meeting, when the BoJ opted to re-evaluate its policy, but carrying through with that re-evaluation into this week's meeting reaffirms that more than incredibly accommodative monetary policy is needed to stimulate the economy.
Central banks will continue taking center stage, perhaps the Romeo and Juliet of this monetary policy opera. However, Mercutio, Tybalt, and Benvolio are also on stage, and while they aren't the main focus right now, you can bet that what they do will influence what the two main characters do. In our case, inflation, equity pricing, bonds, and more play our 'secondary characters', but their influence down the road will prove anything but.
Andrew
Let's begin with the latest FOMC forecast for the long-term.
 |
| Federal Reserve |
The vote to maintain the current interest rate of 0.25 to 0.50 percentage points landed at 7-3, a pretty strong signal that some members inside the Fed are getting a little antsy with respect to keeping interest rates low, and I agree. The Fed almost seems scared these days, worried that even a minimal jolt to the economy could bring everything crashing down, and thus the best way to keep things steady is to keep interest rates steady. This mindset has created a whole other level of problems alone, but that's a post for another day.
 |
| Federal Reserve |
The Federal Reserve isn't the only central bank that had their monetary policy meeting this week; the Bank of Japan also met up.
At their previous meeting, the Bank of Japan announced it would re-evaluate its current monetary policy, which set off concerns amongst investors if this was a warning shot, if the BoJ might stop pushing ahead with negative interest rates and QE. This week, the Bank of Japan came out and modified their policy slightly, now to a yield-curve based goal. The BoJ will now aim to keep 10-year Japanese government bonds around 0%, and while this is still very accommodative monetary policy, it's also a cessation that plunging further into negative interest rates right now, when the benefits are beginning to be questioned, is not the right move. It's part of a larger cessation that the Bank of Japan is running out of tools, something we've all known for a while, but no one really knew when the Bank would begin realizing that. One could effectively argue that this realization moment came at their last meeting, when the BoJ opted to re-evaluate its policy, but carrying through with that re-evaluation into this week's meeting reaffirms that more than incredibly accommodative monetary policy is needed to stimulate the economy.
Central banks will continue taking center stage, perhaps the Romeo and Juliet of this monetary policy opera. However, Mercutio, Tybalt, and Benvolio are also on stage, and while they aren't the main focus right now, you can bet that what they do will influence what the two main characters do. In our case, inflation, equity pricing, bonds, and more play our 'secondary characters', but their influence down the road will prove anything but.
Andrew
No comments:
Post a Comment