As expected, the Fed’s rate is up by 25 bp

The Federal Reserve has pushed up its main interest rate by 25 bp. The corridor in which the fed funds can fluctuate will now be [0.50 ;  0.75%] instead of [0.25 ; 0.50%]. The last rate change was December 2015. 
For 2017, the median value of the fed funds rate is expected at 1.375% which means 3 rate increases. The same pace is expected for 2018 and 2019 with rate anticipated at 2.125% and 2.875% respectively. 
The long term equilibrium value for the fed funds is marginally higher at 3% versus 2.9% in September. 

The global Fed’s scenario remains weak. The Fed tells us that the business cycle is still consistent with a secular stagnation framework: low growth, low inflation and low interest rates. The economy is not back to its pre-crisis momentum. 
The long term growth rate is just 1.8% unchanged from September forecasts and the inflation rate is expected to converge to 2% in 2018. It’s also its long term value (as in September) 

I was not able to watch the press conference (no connexion for a video in a train even a TGV) but my perception on the future of monetary policy is unchanged from what I said earlier today (see here)

What can be expected from the Fed’s meeting today?

The Fed will decide, with a high probability, to increase its main rate by 25 bp at its meeting today. The US central bank has mentioned so many times this hike that it has to do it. It’s a question of credibility.
What will happen in 2017?

My analysis
Monetary policy in the current cycle is the main support for the private domestic demand in order to boost growth. This has always be the case but the current situation is specific for three reasons
1 – The world trade momentum is not strong enough to create an impulse on growth. In the past, this momentum was strong and the impulse associated with it was important as it helped the economy to converge to a higher profile. This was important for Europe.
2 – The low productivity momentum in the US has not allowed for a strong rebound after the last US recession. Therefore the US growth pace is lower than before and its impact on the world economy is weaker
3 – Fiscal policies are neutral since 2014. This highlights the role of the private domestic demand in the current environment Continue reading

Understanding Global Inequality: Interview of B.Milanovic

Fascinating interview of Branko Milanovic on income inequalities, within countries and between countries, and on globalization after the referendum on Brexit and the election of D.Trump. Worth reading.

The ECB maintains its strategy

The ECB has decided to maintain its interest rates but has changed its quantitative easing operation. The operation is extended to December 2017 at least. It will stop at this date if long term inflation expectations converge to 2%. If it is not the case the operation will continue. There is no mention related to the end of the QE. There is no tapering scenario in the current ECB strategy

The ECB’s behavior is quite simple to understand Continue reading

The Italian Malaise

Matteo Renzi has well and truly lost the referendum that took place on December 4.

Turnout was very high at 70%, and the referendum showed a considerable difference in the number of voters for the no and yes camps. The no campaign clearly won a clear majority with 59.1% of votes vs. 40.9% for voters in favor of constitutional reform, so it is certainly not a close call that fails to garner attention.

However, the markets’ reaction was not extreme. The euro fell below the 1.06 mark against the dollar, while the equity markets in Asia saw only on a moderate drop, with Tokyo closing down 0.8%. Yields on Italian bonds rose, wiping out the drop seen at the end of the week.
Investors are adopting something of a wait-and-see attitude, which is reassuring in one sense as there is no major backlash following the result. But the whole affair is far from over.

Matteo Renzi will present his resignation, which will very probably be accepted, and in the meantime, the current government can no longer operate effectively following yesterday’s result.
Italian president Sergio Matarella will have to consult and appoint a new prime minister to form a new government, and this could be Matteo Renzi. This whole process will take several weeks.

We would raise a number of points: Continue reading