The Federal Reserve kicked things off on Wednesday last week with a highly anticipated increase in the federal funds rate to 1.50%. The Fed also anticipates three further 25 bps increases in 2018. Additionally, the Fed’s balance sheet will shrink by $10 billion in December and $20 billion in January. Even with these changes monetary policy remains accommodating – rates are historically very low and money is easy.
Looking to the future, Yellen and economists at the Fed anticipate stronger GDP growth of approximately 2.5% this year and next along with lower unemployment. Inflation is still below expectations, but there is faith wage pressures will mount as companies increasingly scramble to find workers.
More interestingly, Yellen downplayed the impact of tax cuts. “While changes in tax policy will likely provide some lift to economic activity in coming years, the magnitude and timing of the macroeconomic effects of any tax package remain uncertain,” Yellen said, though she also suggested the tax package holds the potential to boost consumer spending and capital expenditures.
Across the pond, European monetary policy is even more accommodating. One day after the Fed’s announcement, the ECB announced its main refinancing rate will stay at 0% and the deposit rate will remain at minus 0.4 %. This is not just easy money, it’s free money!
Additionally, the ECB reiterated that it “stands ready” to increase the size of its bond-buying program in the unlikely event that the recovery sputters. The EU’s economy is doing quite well, by European standards, with the latest forecasts of 2.4% growth in 2017 and 2.3% in 2018. Inflation is still disappointing, however, with the latest forecasts suggesting headline inflation will finish 2017 at 1.5%, before dipping to 1.4% in 2018. Unemployment is still high in the EU, which means Europe will not benefit from wage pressure as we should in the U.S. Still, the ECB’s uber-easy policy is viewed as appropriate considering Europe’s economic recovery is a few years behind that of the United States.
Finally, the Bank of Japan meets this week, and despite some good recent GDP numbers, everyone expects its easy money policies to continue. So the message is really consistent across the globe: easy money policy supporting continued economic expansion with little change in sight. Happy Holidays!Source: The Financial Times, Bloomberg, the NY Times, BCA Research, the Economist