This Week In The Economy: Fed Signals Rate Hikes To Continue, Global Relapse?

Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers.

The U.S. central bank this week announced another increase in short-term interest rates, raising its target for the federal funds rate to 2.25%. Senior Fed officials again noted that “the labor market has continued to strengthen” and economic activity “has been rising at a strong rate.” Unlike the August gathering, however, the Fed this time dropped its description of current monetary policy as being “accommodative.”

In central banking parlance, policy is accommondative when actions are being taken to lower interest rates, with the goal of encouraging more lending by banks to boost economic activity.

While the Fed is not expected to begin a phase of sharp rate hikes similar to the late seventies and early eighties, projections released with its announcement point to a continuation of the gradual pace of rate increases.

The Summary of Economic Projections (SEP) is released every quarter, and is meant to capture Fed officials’ forecasts for economic growth, employment, inflation as well as their outlook for future changes in interest rates.

In September’s version, their collective GDP forecast for 2018 was revised up from 2.8% to 3.1% ( the U.S. government confirmed this week that the economy grew by 4.2% in Q2). The expectation for 2019 was revised up to 2.5%. The outlook for core inflation (excluding food and energy prices) was unrevised, while they expect the unemployment rate to end this year at 3.7%.

Source: FTN Financial

Also included in the report is the “dot-plot”, a graph depicting each Fed official’s forecast for the future path of short-term interest rates — with each person’s prediction represented by a dot. According to the chart above, 12 of 16 present at this week’s meeting favored one more hike to 2.5% in 2018. For 2019, 14 expect to raise rates again, although there is less agreement on how fast the Fed should proceed.

“With interest rates still unusually low and central banks’ balance sheets still bloated as never before, there is little left in the medicine chest to nurse the patient back to health or care for him in case of a relapse.”

In other U.S. economic news this week, strong aircraft demand fueled new orders for manufactured durable goods (expensive items such as machinery and equipment that power economic activity) in August — jumping 4.5% after a 1.2% decline in July. Excluding transportation equipment, orders were only up a mere 0.1%.

Meanwhile the U.S. consumer remains bullish in their assessment of current conditions and their outlook for the future, according a separate report this week. The Conference Board said its Consumer Confidence Survey showed optimism close to an 18-year high:

“ Consumers’ assessment of current conditions remains extremely favorable, bolstered by a strong economy and robust job growth … . These historically high confidence levels should continue to support healthy consumer spending, and should be welcome news for retailers as they begin gearing up for the holiday season.”

Not a surprise then to see the rate of new home sales in the U.S. was 3.5% higher in August compared to July, and 12.7% higher compared to a year ago. In terms of supply, 318,000 new houses were estimated to be available for sale at the end of August, ~6 months of inventory at the current sales rate. The average sales price was $388,400.

On the global front, the United States this week signed an updated Free Trade Agreement with South Korea, although the new agreement is not all that different from the version negotiated by the Bush and Obama administrations. The main exceptions are; more U.S. automobiles will now be exported to South Korea, reduced red tape for U.S. agricultural exports, and South Korea secured an exemption from the U.S. tariff on steel imports.

Also, the threat of punitive duties on its auto imports appears to have forced Japan to the negotiating table, based on the announcement this week that the U.S. and the world’s third largest economy will begin talks on a bilateral trade agreement. Up to this point, Japan had resisted the Trump administrations requests for a deal — holding out hope instead that the U.S. would rejoin the Trans-Pacific Partnership.

However, all is not so well in the U.S.’ ongoing talks with Canada to revise NAFTA, with expanded access for U.S. dairy exports one of the main sticking points. While administration officials have vowed to press ahead and sign a deal with just Mexico if Canada doesn’t budge, many lawmakers warn that any agreement without the northern neighbor will be difficult to get through Congress.

This all comes as new data shows the U.S. trade deficit widened last month, and the World Trade Organization (WTO) predicts less trade flow between nations this year and into 2019.

The U.S. Census Bureau reported the international trade deficit was $75.8 billion in August, compared to $72.0 billion in July. Exports of goods for August were $137.9 billion, $2.3 billion less than July exports. Meanwhile the WTO expects 3.9% growth in merchandise trade volume in 2018, a downward revision from its April prediction of 4.4%, with the trade expansion slowing further to 3.7% in 2019.

To compound matters, the Business Roundtable (a group representing the CEOs of America’s largest companies) released its Q3 CEO Economic Outlook Survey showing plans to cut back on investment and hiring “as business leaders experience uncertainty and negative effects from the Administration’s actions on trade.”

Source: Business Roundtable

UK Sheds Additional Light On What A ‘No-Deal Brexit’ Would Look Like — The UK government this week released another set of technical papers intended to prepare businesses and consumers for life after the European Union. The latest batch covered topics such as aviation safety and security, farming regulation, and new tariff guidelines.

German Companies’ Less Rosy OutlookThe ifo Business Climate Index is a closely-watched early indicator of economic developments in Europe’s largest economy. September’s survey showed sentiment among German firms weakened slightly, as assessments of their current business situation deteriorated marginally, and they also scaled back their business expectations somewhat. The report noted, however, that “despite growing uncertainty, the German economy remains robust.”

Argentina’s Central Bank Governor Quits As IMF Talks Continue — The head of Argentina’s central bank resigned this week in the middle of ongoing negotiations with the International Monetary Fund over rescue funds, creating another headache for President Mauricio Macri to deal with. Luis Caputo had only been in the job for three months, and cited personal reasons for his decision.

Oil Prices’ Upward Swing — And finally, oil prices have been on an upward trajectory in recent months, and oil group OPEC was in the news this week when, following a meeting of major oil producers at the beginning of this week, the group “expressed its satisfaction regarding the current oil market outlook,” and said there is “an overall healthy balance between supply and demand.” This did not go down well with President Trump, who during his address to the United Nations general assembly, accused the cartel of “ripping off the rest of the world.”

Founder — SW4 Insights. Public policy junkie and Central Bank Watcher. Recovering journalist and former Senior Director at Hamilton Place Strategies

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