The Federal Open Market Committee (FOMC) minutes have indicated the Fed Reserve would raise rates "fairly soon," which in my opinion means June.
The minutes read: “Many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the Committee's maximum-employment and inflation objectives increased.”
The FOMC signals are not strong enough to suggest there is an intention to move in March. The economy could justify it, but the Fed does not appear to have prepared financial markets for that eventuality.
Separately, Fed speakers have been reaffirming that they do not see advantage in creating unnecessary uncertainty in financial markets.
There was also interestingly a clear commitment to start talking about the necessity of moving to some form of passive tightening of quantitative policy. The Fed is suggesting that it would not reinvest the proceeds from bonds when they mature and it would not invest the, albeit very small, coupon payments that it receives from its bond portfolio. That would accelerate the existing pace of the decline in the Fed’s balance sheet to GDP ratio.
How the Fed chooses to handle this is important because it could end up being a fairly lumpy series of moves. It it’s left entirely to the timing of redemptions and coupon payments.
Treasury Secretary Steven Mnuchin, in words that may come back with a vengeance in the future, said in an interview with the Wall Street Journal: “For longer-term purposes, an appreciation of the dollar is a good thing and I would expect longer term, as you’ve seen over periods of time, the dollar does appreciate, adding, in the short term, there are certain aspects (of a strong currency) that are positive about the dollar for our economy and there are certain aspects that are not as positive. A lot of the appreciation of the dollar since the election in particular is a sign of confidence in the Trump administration and the economic outlook for the next four years.”
International investors concerns about U.S. policy is, for one reason, that the U.S. may struggle to find the $2.7 billion a day it needs to finance its current account imbalance.
Domestic U.S. investors have a quite positive attitude when compared to international investors, but U.S. domestic investors do not drive the dollar, foreigners do, which is an important point to take into account for long-term investors.
Part of the issue is that as the world economy grows, people are reducing savings and are spending money, and the world tends to prefer dollars to save, but it uses euros when it goes shopping.
I still believe that the dollar will be biased to weakness over the coming months.
By the way, Mnuchin’s view of a strong dollar over the longer term is in fact, at least in my view, nothing more or else than a continuation of stating what his predecessors have continuously told us over the past couple of decades. I wouldn’t put too much weight on it.
One thing I do know is that a too strong currency is not helpful for stimulating exports.
Maybe it could be helpful to keep in mind that it’s a fact that the dollar is at present an overvalued currency, this according to the latest Bank of America Merrill Lynch Global Fund Manager Fund Survey.
Across the ocean, Germany has released its revised fourth quarter GDP number that expanded 1.20 percent over the same quarter of the previous year, but as always, will be revised in the future.
According to the latest data on global GDP released by the World Bank’s Development Indicators, the U.S. is still the world’s biggest economy by far. America generates almost a quarter (24.3%) of global GDP. The U.S. is almost 10 points ahead of China (14.8%), which is second on the global scale, and more than 18 points ahead of Japan (4.5%), which ranks third and close to 20 points ahead of Germany in fourth place.
No doubt that uncertainty, which is everywhere on the globe these days, makes it more difficult for people and businesses to make long-term investment decisions.
My investment preference remains the United States.
Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.
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