The Fed's aggressive rate increases last year had the potential to stress the global financial system as the US dollar soared, but the impact was muted by largely synchronized central bank rate hikes and other actions taken by monetary authorities to prevent widespread dollar funding problems for companies and offset the impact of weakening currencies.
Now Brazil, Chile and China have begun cutting interest rates, with others expected to follow, actions that international officials and central bankers at last week's Jackson Hole conference said are largely tuned to an expectation the Fed won't raise its rate more than an additional quarter percentage point.
While US inflation has fallen and policymakers largely agree they are nearing the end of rate hikes, economic growth has remained unexpectedly strong, something Fed Chair Jerome Powell noted in remarks on Friday could potentially lead progress on inflation to stall and trigger a central bank response.
That sort of policy shock, at a moment of US economic divergence with the rest of the world, could have significant ripple effects.
"If we get to a point where there is a need for ... doing more than what's already priced in, at some point markets might start getting nervous ... Then you see a big increase in the risk premia in different asset classes including emerging markets, including the rest of the world," said International Monetary Fund chief economist Pierre-Olivier Gourinchas. "The risk of a financial tightening, a very sharp financial tightening, I think we cannot rule that out."
After the pandemic shock and the inflationary rebound that had most countries raising rates together, it's normal now for policies to diverge, Cleveland Fed President Loretta Mester told Reuters on the sidelines of the Jackson Hole conference on Saturday.
"The economy is a global economy, right? It's an interconnected economy," Mester said. "What we do with our policy - if we can get back to 2% in a timely way, in a sustainable way, if we have a strong labor market - that's good for the global economy."
Fed policymakers will deliver a crucial update to their economic outlook at the 19-20 September meeting, when they are expected to leave their policy rate unchanged at 5.25% to 5.5%.
Yet Fed officials remain puzzled, and somewhat concerned, over conflicting signals in the incoming data.
US gross domestic product is still expanding at a pace well above what Fed officials regard as the non-inflationary growth rate of around 1.8%. US GDP expanded at a 2.4% annualized rate in the second quarter, and some estimates put the current quarter's pace at more than twice that.
The contrast with other key global economies is sharp. The euro area grew at an annualized 0.3% in the second quarter, essentially stall speed. Difficulties in China, meanwhile, may drag down global growth the longer they fester.
European Central Bank President Christine Lagarde noted after the Russian invasion of Ukraine last year, the outlook was for a euro-area recession, and a potentially deep one in parts of it.
"We expected all that to be a lot worse. It has turned out to be much more robust, much more resilient," Lagarde said.
U.S. fiscal policy is driving some of the difference with $6 trillion in pandemic-era aid still bolstering consumer spending. A recent investment push from the Biden administration is supporting manufacturing and construction.
China may also play a role, economists say. Its slowdown after a short-lived growth burst earlier this year could pinch Germany's exports and slow Europe's growth, for instance.
But, Citigroup Chief Economist Nathan Sheets said, "When you hear economists give you three or four reasons for something, that's usually because we really don't know."
No comments:
Post a Comment