US Policy Normalization Efforts Continue Apace

Weekly Report - 17/12/2017

Federal Reserve’s Tightening Contrasts With ECB and BoE


For the final decision under the stewardship of Federal Reserve Chair Janet Yellen, the FOMC raised the benchmark rate, keeping its tightening aspirations alive and preparing for an additional three rate hikes in 2018 as the balance sheet is gradually unwound. By comparison, the Bank of England held off further hikes despite rising inflation while the ECB promised to maintain a reduced pace of stimulus.

Last Week

As 2017 winds down, the final monetary policy decisions for the year from several institutions showed no major surprises. The US Federal Reserve raised rates by 25 basis points to 1.50% as expected. Apart from the adjustment, the pace of balance sheet reductions will grow to $20 billion per month in January with policymakers currently projecting another 3 rate hikes during 2018. In addition, growth forecasts were revised higher thanks to progress made on tax reform while unemployment was forecast to fall further. In the UK, the Bank of England refrained from adjusting policy, keeping rates on hold despite the upside pressure of inflation. Nevertheless, there were some hints additional rate hikes are on the horizon, especially after inflation topped the Central Bank’s mandate by more than 1.00%. The ECB also abstained from altering interest rates, instead announcing its intention to reduce monthly asset purchases as planned to €30 billion per month. However, inflation remains a sticky subject, with officials highlighting the Bank’s ability to change the size or duration of asset purchases as needed to support the economy. In response to US moves, China raised short-term borrowing rates despite the pressure the economy is facing as the annualized growth rates for fixed asset investment and industrial production decelerate.


The Week Ahead

Following a week of interest rate decisions, the focus will shift towards third quarter gross domestic product figures. Topping the list is United States GDP which is forecast to match an earlier estimate of a 3.30% annualized pace of growth for the three months ended in September. Aside from growth, the Federal Reserve’s preferred PCE measure of inflation is scheduled to be released, with the rate of price increases expected to gain 1.50% year over year. Other important US-related data includes core durable goods orders which signify business investment alongside existing home sales numbers, housing starts, and new building permits. Northern neighbor Canada will be unveiling its monthly GDP figure for October, with the result projected to meet September’s print of 0.20%. Moving over the Atlantic, the United Kingdom will also be announcing third quarter GDP, with forecasts calling for a final reading of 1.50%. Trade-related talks will be ongoing following the conclusion of the first stage of Brexit negotiations. Across the English Channel, Europe is set for the release of final inflation figures for November. To round out the week, the Bank of Japan will be announcing its latest interest rate decision, with no changes to policy forecast. Finally, New Zealand will be releasing its own growth figures, with the annualized pace of third quarter GDP expansion anticipated at 2.50%.


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