Federal Reserve (FED) chairman Jerome Powell said, last month, that interest rates are just below the “neutral rate” ahead of the FOMC meeting. FED member Williams announced, after the last meeting of this year, that the planned increases on the interest rate are not commitments. What does these mean and why they have said these? There are some reasons that could lead FED to become more dovish – tend to increase the interest rates less or decrease it- after following a hawkish -tend to increase the interest rate- perspective since Powell came to power. During his term, Powell increased the interest rates four times from 1.5% to 2.5%, following the previous chairwomen Janet Yellen’s policy. FED’s tightening policy led to inverted yield curve which is higher short-term interest rates than the long term. The recessions of 1970, 1974, 1980, 1982 and 1990 started with the inverted yield curves and this fact worries the Trump administration as well as the FED.
The economy of the US is having a shiny time as the unemployment rate below 4% which is recognised as the neutral unemployment rate and the inflation stands at 2.5%. The US economy has shown a dramatic performance in terms of growth in the past a few years 2.35% last year and 3.3% as of third quarter and expected to grow over 3% this year.
Impressive numbers for an economy that is as big as almost 20 trillion dollars.
However, there are some numbers that worry some such as the budget deficit which stands around -3.5% and current account deficit -2.4% which is the main reason for Trump to decide on the trade tariffs on China. It doesn’t seem to work so far as the trade deficit of the US went down to 55.5 billion dollars in October. Trade deficit is also jumped to 43.1 billion dollars with China, hitting a record high. The situation is also same with Europe as well by around 30% in favour of Europe.
Last month OECD cut Global Growth rate estimations to 3.5% from 3.7% as a recession is expected to take place in the developed countries next year. FED’s hawkish policy and the tariffs on China had brought risks to the markets in several ways. The bearish, decrease on the stock market, run on American markets might just be the early signs of the recession. American stock markets had a terrible few months. Loses of the technology shares have hit the market badly as Apple and Amazon came down from a trillion-dollar values. Apple’s miss on the numbers sold considered as the sign of a slowdown even though it increased the price per iPhone, meaning new models sold more which are more expensive. Such losses have seen in Microsoft and Amazon too and many other techno companies, dragging the markets from all-time highs.
Germany on the other hand, seem to suffer on the uncertainties from the trade-related issues. Brexit deal with the UK has took one headache out of the table replacing it with Italy as the new government in Italy resist to cut budget deficit. On top of this Europe has shown the lowest growth rate since 2013 by 0.2% on the third quarter. The currency crisis in Turkey also increased the risks in Emerging Markets even though it seems to be calming.
In Asian part of the world, there are some signs that might put the financial well-being into trouble. Industrial production growth has calmed down in China meaning a slower production in the coming terms. Also, OECD projected that the growth will be hit due to trade tensions worldwide. China is expected to grow 6.8% this year and 6.5% next year. India on the other hand expected to pursue its growth momentum by growing over 7% this year and over 7.5% next year.
Having such outlook in the world economy while some disturbing facts in US economic conditions might put FED into the corner. Also, Trump’s comments on the FED should be considered significant. Thus, FED’s Powell just signalled an easing monetary policy approach.
Rising trade costs might make unanticipated effects on the global economy. Commodity prices are important to ease the tension to keep up with the growing world economy and could be said that Trump is doing a great job by pressuring OPEC countries to keep the oil prices low. And low commodity prices tend to increase risk appetite worldwide.
To sum up, I think FED cannot follow the path that it has drawn for the next a few years as the world economy close to step in to recession area. Even though some FED members underlined some of the dangers ahead, Powell’s explanation on the interest rates wasn’t expected.