In December, the Federal
Reserve was the most-talked about central bank in the world. As the Federal
Open Market Committee (FOMC) met, they were questioned by economists against
raising interest rates. This is because the economic growth had slowed down. To
reinforce their independence, the officials decided to raise hikes and point to
more rate hikes this year. This led to a sharp decline in the US stocks as
investors moved to safe haven assets like treasuries and bank stocks.
In
January, even before the members met they had changed the tone. In interviews
and events, the officials, including the chair said that they would be
flexible. This was interpreted to mean that the officials would not increase
rates as they had projected. When they met, they released a statement saying
that they will be patient.
This
happened even as the US economy appeared to be firing on all cylinders. In
December, the economy had added more than 300k jobs and the unemployment rate
was still lower. In January, the economy added more than 300k jobs.
This
month, the forecasted low growth picture has started to emerge. Last week, the
OECD became the latest organization to lower the global growth forecast. Other
organizations that have lowered this forecast are ECB, IMF, World Bank, and
BOE. They have all blamed it on the global trade conflict and the uncertainties
brought about by Brexit.
At
the same time, data from the US appeared to be weaker than expected. The jobs
numbers released on Friday showed that the economy added more than 20k jobs.
This was much lower than the expected 180k. The unemployment rate dropped to
3.8% while the participation rate and wages increased. The trade numbers
released last week showed that the trade deficit had grown to the highest level
in 10 years. These numbers were followed by the inflation numbers released
yesterday. The numbers showed that the core CPI rose by just 2.1%, which was
lower than the expected 2.2%. The headline CPI rose by 1.5%, which was slightly
lower than the expected 1.6%.
Therefore,
these numbers reinforce the thinking that the Fed is likely to continue to hold
interest rates at the current levels. They also show that there is a likelihood
that next move by the Fed could be lower.
There
is a ray of hope because the talks between the US and China appears to be
progressing well. A deal is expected to be reached within a few weeks. The
chart below shows the performance of the dollar index in the past few weeks.
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