On Tuesday we got not especially coherent statements from three Federal Reserve bank Presidents.
St. Louis Fed President James Bullard was dismissive of the impact of the UK referendum on the U.S. and yes, directly, the UK doesn’t matter that much.
What will matter will be the impact on the U.S. of slowing growth in the Eurozone.
According to the IMF, growth will slow down as a consequence of the Referendum to 1.6 percent this year and 1.4 percent in 2017. Both years were revised down from 1.7 percent.
Minneapolis Fed President Neel Kashkari was suggesting that we do not know what the UK Referendum result means, which probably makes a lot of sense.
Now, where things get interesting is the clear sense of tension within the Fed over policy direction.
Neel Kashkari suggested there was no urgency to raise rates because inflation was low.
That is not, strictly speaking, true. Most inflation measures in the United States are at or above their 20-year averages, which is not exactly a signal of low inflation, especially in the context of quantitative and monetary policy accommodation. Indeed, the pressures in the labor market combined with the current state of inflation suggest that the U.S. is facing a growing inflation problem.
Cleveland Fed President Loretta Mester meanwhile was dismissive of negative rates saying onward and upwards was the right direction for monetary policy and reiterated that every Fed meeting was in play for tightening.
Interestingly, the just released Fed Discount Rate Meeting Minutes show that 6 of 12 Fed banks wanted a 25 basis points discount rate increase in June, versus 4 of 12 in April.
The spectrum of opinion on policy is perhaps reflecting the confused times in which we live as well as the multifaceted nature of Central Bank policy.
One could look to tighten quantitative policy, hold monetary policy steady, ease regulatory policy, all at the same time, at least in theory.
In Japan, where Central Bank policy is a whole different set of problems, industrial production contracted again by 2.6 percent month-over-month and by 0.4 percent year-on-year.
The markets however are fixed on the next stimulus and not on the last set of bad numbers to which Japan is used to.
The Sankei newspaper reports that Etsuro Honda, an economic adviser to Shinzo Abe, told the Prime Minister that now is a good time to embark on a policy of ‘helicopter money.’ However, Chief Cabinet Secretary Yoshihide Suga subsequently said that the government is not considering this option, adding that the Bank of Japan would decide monetary policy steps based on market movements and the economic environment.
It’s worth reiterating that Japanese consumers have the highest inflation expectations of the developed world economies and it is one of the things that is undermining consumer spending. Now, adding to those high inflation expectations a promise of ‘helicopter money’ is probably not the best way to stimulate spending.
In the United Kingdom, the Queen is expected to appoint Theresa May as the new Prime Minister today. She will become Britain’s second woman Prime Minister, after Margaret Thatcher (1979-1990).
There are a couple of focus issues for markets around this:
First, the final Prime Minister’s questions for the outgoing Prime Minister should allow some good old-fashioned political infighting and perhaps some limited indications on the future part of policy.
Second, there is media speculation that the Chancellor of the Exchequer will be changed and as the UK economy is expected to face some weakness, that could matter a lot to markets and of course to investors.
Finally, the Congressional Budget Office just released its ‘2016 Long-Term Budget Outlook’ wherein we read that U.S. debt will rise faster than previously expected over the next two decades due to slower economic growth and congressional approval for tax cuts last year. The CBO predicts that federal debt will climb from, at present, 75 percent of GDP to 122 percent by 2040, significantly up from CBO's previous estimate of 107% for 2040.
No that doesn’t look good at all as far as the real value of the dollar is concerned and that’s why physical gold, no gold on paper, will always make sense of being part of a realistically structured portfolio.
Of course, that’s my personal opinion.
Etienne "Hans" Parisis
is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.
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