Essentially central bankers face a dilemma – either lean more on politicians to do more to boost growth or embark on a new round of experimentation.
“Yellen last week was really quite significant – she was very firmly reiterating that she expects to go this year, ” said BNP Paribas FX strategist Sam Lynton-Brown in London. It is too early to reflect on whether it was the right the decision or not and the impact it will have on the financial markets.
After the Fed ended quantitative easing back in November 2014, the stock market carried higher for a while but it has since hit headwinds due to the absence of the tens of billions of dollars that were being printed out of thin air by the Fed, much of it finding its way into the equity markets.
Yet as the International Monetary Fund noted, Japan and Europe are unlikely to grow any faster without serious structural change. But it edged up against the British pound, which slipped to US$1.5157 from US$1.5174. Yet he also said the Fed was getting ready to act. The result follows a 0.5 percent income gain in July, which had been the best showing in eight months.
San Francisco Fed President John Williams, speaking later on Monday, made a similar argument. But inflation has been running below the Fed’s target for more than three years and recently has fallen even farther from the 2 percent goal.
There’s a “substantive political economy danger that once a government uses OMF, it is then tempted to use it again in an undisciplined and excessive fashion”, he wrote.
“There are excessive expectations about what central banks can do”, ECB vice president Vitor Constancio told Reuters in an interview.
“On the global side, I’m not seeing any obvious signs that those risks that were on my mind and the minds of others, I don’t see signs that those have gotten worse”, Williams, a voting member on the Fed’s policy committee this year, said in Salt Lake City on Thursday. And given the uncertainties of this period of secular economic stagnation in advanced economies and the effects of experimental monetary policies, there is a strong likelihood of occasional policy reversals along the way.
USA inflation has run below the Fed’s target for years, and the dropping price of oil and a stronger dollar has weakened inflation further.
The key to lifting inflation to a level deemed comfortable by Federal Reserve policy makers is rising wages.
Without that guesstimate, I think the September number will come up short.
“It directly injects purchasing power into the economy and will increase activity or inflation or both”, he wrote, contrasting it with quantitative easing that comes with no guarantee that new money will lead to more spending. According to the Wall Street Journal, “A preliminary measure of Chinese factory output in September was the lowest since the financial crisis, adding to a parade of weak data that is increasingly eroding hopes that China’s slowdown would stabilize in the second half”. And this column warned you ahead of time that this was going to happen.
Most of these countries also are emerging market economies, but a few are advanced economies, like Canada and Australia.