Let’s Wait Awhile: US Economy
The latest press conference by the Federal Reserve stated that the economic data is showing a positive economic outlook, which is getting closer towards the employment and inflation target. Market expects the Fed will increase the interest rate target in December.
Newest Publication: The Fed
Last Thursday, the Fed announced that the labour market and inflation performance is closing its gap to the Fed’s forecast. Based on data they gathered, the Fed is confident that the market’s performance is consistent as expected. Low mortgage rates help the housing market performs well and increases consumer spending. To put it another way, low interest rates help Americans to take loan and to boost their expenditures.
Nonetheless, not everyone is satisfied with the latest announcement. Market complaints that the historical low interest rate target has hurt savers for too long. If the Fed taking too much time to wait for more hints, it would be hard for them to catch up with rising inflation. The Fed’s credibility is being questioned by the market since the Fed said they would increase the interest target four times within this year without actually doing it.
To sum up, the Fed is expected to increase the interest rate target at December’s press release, which is 6 weeks after the US election day. Bloomberg’s data shows there’s 80% probability of rising interest target next month. Even so, the Fed will still look closely at the market condition and gather more data to predict their next move.
The Fed’s comment about US election
Janet Yellen, the chief of the Federal Reserve, said that greater clarity about economic policy put into effect is needed to predict the economic outlook. Regarding the new projected US fiscal policy, she gave three advices. First, the government needs to consider about the aging population of baby boomers, which is related to labour market and productivity of firms. Second, current debt to GDP ratio is 77%, which means that cutting taxes and increasing government spending will accumulate US’s debt. Looking at the good economic condition, the government does not need to boost spending as much as US did during the financial crisis. High percentage of debt to GDP ratio makes the US economy vulnerable if there is another major economic recession coming up. Third, US productivity is slowing down since the financial crisis. Thus, Yellen suggests that the government needs to make a policy that considers about the long run productivity and growth.
Trumpflation
Donald Trump projected $4 trillion cut taxes over the next couple years. Macroeconomist advisers predict the economy would only grow by 0.2 percentage point over the next 3 years. In addition, Trump also proposed $1 trillion government spending on infrastructure which will fuel the economy, and eventually inflation, requiring faster interest rate hikes. On the contrary, Trump’s protectionism stance would be a backlash on the economy. Rising interest rate would bring less benefit to the Americans since stronger US dollar means that export would be lower.
The impact of Trump’s aggressive infrastructure spending increases investors confidence in the market. US Treasury yield curve steepen since investors expect the Fed would increase the interest rate target any time soon. Bond prices drop because investors sell their bonds and transferring their money to the stock market. Looking at market behaviour, the Fed does not have much option other than fulfilling market’s expectation.
