This Week In The Economy: Fed On Hold Until 2020, UK Gets Brief Reprieve, Global Exporters’ Woes Drag On

Federal Reserve Unlikely To Raise Interest Rates Again Until 2020

The Federal Reserve this week downgraded its assessment of the U.S. economy, with senior officials projecting the central bank will maintain its current pause in short-term interest rates hikes for the rest of the year.

In a statement following its two-day March meeting, the Federal Open Market Committee noted the slower rate of economic growth in the first quarter compared to Q4, highlighting less spending by households and businesses:

“Information received since the Federal Open Market Committee met in January indicates that the labor market remains strong but that growth of economic activity has slowed from its solid rate in the fourth quarter … . Recent indicators point to slower growth of household spending and business fixed investment in the first quarter.”

Fed officials were also more measured in their assessment of the employment picture. After the describing the labor market as continuing to strengthen following their January meeting, the FOMC changed its language to “remained strong” in this week’s statement.

They also cut their median forecasts for U.S. GDP growth for 2019 by two tenths of a percentage point to 2.1% and by one-tenth of a percentage point for 2020 to 1.9%, while expecting an uptick in unemployment this year and in 2020.

As a result, 11 of the 18 Fed officials at the gathering now predict short-term interest rates to end 2019 at their current level, while the majority held out the possibility of just one rate hike in 2020.

The Fed also decided to adjust the pace of its balance sheet normalization efforts, scaling back the reduction of its Treasury securities holdings from the current level of $30 billion a month to $15 billion beginning in May and halting the process in September.

UK Granted Extension By EU As Brexit Chaos Drags On

UK Prime Minister Theresa May this week asked Europe’s leaders to extend the deadline for her country’s exit from the European Union to avoid a no-deal Brexit, buying her time to convince a divided Parliament that continues to reject the original agreement.

The EU granted May’s request to push back the March 29 deadline, but with conditions:

  • A May 22nd deadline if Parliament approves the government’s withdrawal deal in a vote next week.
  • A shorter extension until April 12th if they reject it, in which case the UK government must lay out its next steps — either requesting another extension or leaving without a deal.

However, the EU is unlikely to grant a further extension unless the UK agreed to hold European Parliament elections scheduled for May 23.

Meanwhile the Bank of England met this week and voted unanimously to leave interest rates unchanged, noting that “Brexit uncertainties” continue to negatively impact confidence and short-term economic activity, especially business investment.

“The economic outlook will continue to depend significantly on the nature and timing of EU withdrawal, in particular: the new trading arrangements between the European Union and the United Kingdom; whether the transition to them is abrupt or smooth; and how households, businesses and financial markets respond.” — Bank of England Monetary Policy Committee

Slowing Global Economy, Trade War Continues To Hit World’s Exporters

The slowing rate of activity, combined with the ripples from the China-U.S. trade war, continues to have a negative knock-on effect on the world’s major exporting economies, as data showed this week.

In Germany, unfilled manufacturing orders were down 0.4% in January compared to the previous month, fueled by a 0.8% decline in foreign orders. Within the data, unfilled orders for producers of intermediate goods (items, such as salt, that are used in the production of other goods) in January 2019 fell by 0.8% compared to the previous month. The producers of capital goods (equipment, machinery, furniture etc.) reported a 0.4% decrease.

Meanwhile the Japanese government this week delivered a relatively downbeat assessment of the world’s third largest economy, noting in its monthly economic report that while economic activity is recovering at a moderate pace, exports and industrial production have been “weak.”

“Attention should be given to the effects of situations over trade issues on the world economy, the prospect of the Chinese economy, the uncertainty of situations and policies in overseas economies and the effects of fluctuations in the financial and capital markets.” — Japan Cabinet Office.

Revised January data released this week showed Japan’s factory production plunged 3.4% to start the year, with manufacturing shipments (a gauge of demand), also down 3.4%.

Home Stretch For China-U.S. Trade Talks?

U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will be in China next week for more trade talks, with President Donald Trump declaring in an interview that an agreement is likely between both sides.

They will be in Beijing on March 28 and 29, after which their Chinese counterparts will travel to Washington in early April. While both sides are pushing hard for a final agreement that Trump and President Xi can sign, a major sticking remains the enforcement mechanism.

Trump warned this week that the tariffs imposed on Chinese exports to the U.S. could remain in place to ensure their adherence to the trade deal. “We’re talking about leaving [the tariffs] for a substantial period of time because we have to make sure that if we do the deal with China, that China lives by the deal,” Trump told reporters.

OPEC + Major Oil Producers Predict Even More Cuts to Oil Output

The Joint Ministerial Monitoring Committee, made up of OPEC members and other prominent oil-producing countries, met this week to review oil market developments and assess the outlook for the rest of the year.

In a statement after the meeting, the group highlighted the “current, critical uncertainties surrounding the global oil market throughout 2019,” and said it is the responsibility of all participating countries to restore stability and prevent the recurrence of any market imbalance i.e. excess supply in the face of weak demand.

“All participating countries present at the meeting, individually and collectively, assured the Committee that they will exceed their voluntary production adjustments over the coming months,” the statement said.

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