US monetary policy tightens as global growth moderates

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest Fed decision, against a backdrop of slower global growth:

  • As expected, the Federal Open Markets Committee (FOMC) increased the target range for the fed funds rate by 0.25% to 2.25-2.50% at their December meeting. Moreover, the Fed projects a further 0.50% increase in the rate for 2019 and a further 0.25% for 2020.
  • Tighter US monetary policy was a major factor behind the significant correction in equity markets in 2018.
  • Recent forecasts from the major forecasting groups point to slower growth in 2019, but there are few expectations of recession. The OECD, for example, projects global growth of 3.5% for 2019 after 3.7% in 2018. However, the risks are on the downside. Recent data have tended to disappoint.
  • The US-China “trade war” remains a factor undermining confidence and growth, but there have been conciliatory Sino-US sentiments recently and few signs of escalation.
  • Slower demand for oil, coupled with plentiful supply, have further undermined oil prices.

UK developments have included:

  • The ONS confirmed GDP growth was 0.6% (QOQ) in 2018Q3.
  • The deficit on the current account of the balance of payments widened to a worse-than-expected £26.5bn (4.9% of GDP) in 2018Q3.
  • Growth in 2018Q4 is expected to be slower than in 2018Q3. However, November’s retail sales were encouragingly buoyant.
  • November’s public finances were encouraging after October’s disappointment. There is a good chance that the OBR’s forecast of £25.5bn for public sector net borrowing (PSNB) for FY2018 will be met.
  • Consumer prices inflation is subdued (CPI inflation eased to 2.3% in November). It is expected to fall further in coming months, reflecting lower oil prices.
  • The housing market remains subdued, with the major weakness in Inner London.
  • The MPC left monetary policy unchanged, as expected, at its December meeting.

Brexit developments included:

  • The Commons “meaningful vote” on the Withdrawal Agreement is expected to be held in the week beginning 14 January 2019.
  • The Commission announced its No Deal Contingency Action Plan. The measures principally covered citizens’ rights, financial services, transport (air and road), and climate policy.

Ruth Lea said, “The Fed’s moves to “normalise” monetary policy, after the ultra-accommodative monetary policy of the Great Recession, are quite appropriate. Economic growth in the US remains robust and the labour market is tight. Moreover, global growth is expected to be reasonable in 2019, albeit slower than in 2018.”

Ruth Lea CBE has been Arbuthnot Banking Group’s Economic Adviser since 2007 and was an Independent Non-Executive Director from 2005-2016.

Ruth co-founded Global Vision in 2007 and was Director until 2010, and was previously the Director of the Centre for Policy Studies (from 2004 to 2007), Head of the Policy Unit at the Institute of Directors (from 1995 to 2003) and Economics Editor at ITN (from 1994 to 1995).  Prior to ITN she was Chief UK Economist at Lehman Brothers, Chief Economist at Mitsubishi Bank, worked for 16 years in the Civil Service (the Treasury, the DTI, the Civil Service College and the Central Statistical Office) and was an economics lecturer at Thames Polytechnic (now the University of Greenwich).

She is the author of many papers and articles on economic issues and has been a Governor of the London School of Economics and Council Member of the University of London.

Tel: 020 8346 3482
Mobile: 07800 608 674
Email: ruthlea@arbuthnot.co.uk

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