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.”