Tags: jerome powell | fed | manufacturing

Unpleasant Surprises Can't Be Excluded Moving Forward

Unpleasant Surprises Can't Be Excluded Moving Forward
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Monday, 22 July 2019 03:33 PM Current | Bio | Archive

Last week was without any doubt an interesting week for taking note of various comments of several members of the Federal Open Market Committee (FOMC) that will decide next week, on Wednesday July 31, about the expected conditions of the Fed Reserve’s monetary policy, which still point to “easing.”

On Thursday, July 18, New York Fed President John Williams gave at the Annual Meeting of the Central Bank Research Association (CEBRA) in New York a prepared speech that he concluded by saying that the key lessons from this research hold today and in the future are:

  • First, take swift action when faced with adverse economic conditions.
  • Second, keep interest rates lower for longer.
  • And third, adapt monetary policy strategies to succeed in the context of low r-star and the ZLB (Monetary policy near the zero lower bound).

These actions, taken together, should vaccinate the U.S. economy and protect it from the more insidious disease of too low inflation.

On the same day, the Fed’s Vice Chair Richard Clarida said in an interview with the Fox Business Network that policymakers might need to act early to stimulate the U.S. economy as an insurance policy against rising risks. You don’t have to wait until things get so bad to have a dramatic series of rate cuts.

Now, two days before, Fed Chair Jerome Powell gave a prepared speech in Paris, France, wherein he said, many FOMC participants judged at the time of our most recent meeting in June that the combination of these factors (trade developments, global growth, U.S. federal debt ceiling, and Brexit remaining unresolved) strengthens the case for a somewhat more accommodative stance of policy adding we are carefully monitoring these developments and assessing their implications for the U.S economic outlook and inflation, and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

So, it shouldn’t come as a surprise that financial markets were “surprised” for not saying confused when on Thursday, the New York Fed itself “clarified,” to some degree, the New York Fed Chairman John Williams’ words, which the financial markets had taken as a clear and loud signal of an “important” Fed funds rate cut next week.

That same Thursday, a spokeswoman for the NY Fed said that NY Fed President John Williams did not “hint” at what “might” happen at next week’s Federal Open Market Committee meeting adding this was an academic speech on 20 years of research. It was not about potential policy actions at the upcoming FOMC meeting on July 31, which will be a very important decision taking day for the Federal Reserve and therefore for investors.

So, as an investor and with what we know today, one could say that in fact not much has really changed about what we already knew from the members of the Federal Open Market Committee (FOMC).

That said, it might be helpful for investors for seeing all this in the context of what happens globally.

The most recent J.P. Morgan Global Manufacturing PMI caught my attention as it reads “Global Manufacturing PMI at lowest level since October 2012.”

The report informs that output has stopped growing, which has impacted hiring and business optimism, with the latter at a series-record low (!).

Conditions will need to stage a marked recovery if manufacturing is to revive later in the year.

Besides that, the Economist Intelligence Unit (EIU) just released its most recent global assumptions for “real” GDP growth.

For 2020 the EIU assumes the U.S. GDP to grow by 1.7 percent; the Euro Area by 1.4 percent; China by 6.1 percent and Japan by 0.4 percent.

Consumer Price Inflation is expected to rise in the U.S. by 1.4 percent; the Euro Area by 1.4 percent; China by 3.1 percent; and Japan by 1.4 percent.

No, these are not stellar numbers, but of course, these are only assumptions. Nevertheless these assumptions hint that unpleasant surprises cannot be excluded moving forward.

As an investor, I personally would try to temper as much as I can my positive expectations that are nourished by hope, for example for rising U.S. consumer price inflation over the next year at least, and adjust my investments, if possible, under such a scenario.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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HansParisis
As an investor, I personally would try to temper as much as I can my positive expectations that are nourished by hope, for example for rising U.S. consumer price inflation over the next year at least, and adjust my investments, if possible, under such a scenario.
jerome powell, fed, manufacturing
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2019-33-22
Monday, 22 July 2019 03:33 PM
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