Dovish outlook.., is the world economy “fragile place” ..?!

For the first time since the Asian and Russian crises rocked world financial markets in the late 1990s, U.S. monetary policy is as focused on the risks to global growth as it is on the domestic economy.

Driving the resurgent internationalism inside the Federal Reserve is concern about how dollar strength — reinforced by aggressive policy easing abroad — could keep U.S. inflation too low when the Fed’s policy rate is close to zero. Another worry is a global economy that’s lumbering along without a prominent engine of growth, said Jon Faust, a former adviser to Fed Chair Janet Yellen. At times like this, you don’t want to risk a significant slip because globally there are so few economies with really strong policy options.

The Fed’s decision Wednesday to hold its benchmark rate target at 0.25% to 0.5% and lower the path of future hikes comes after global finance ministers and central bank governors agreed in Shanghai last month to use all policy tools to strengthen growth.

Core Inflation

Even with signs of life in U.S. core inflation measures and payroll gains averaging 235,000 over the past six months, Fed officials lowered their median estimate on how far interest rates would rise this year to just two hikes instead of the four they published in December. The less aggressive rate path comes amid rising expectations of additional easing by the Bank of Japan and more monetary stimulus put in place by the European Central Bank this month. 

The new policy emphasis focuses on restrained divergence from other central banks and sensitivity to the risks policy actions could have on foreign economies and the U.S. through channels such as a strong currency, which can keep inflation too low and depress manufacturing and exports.


-“Their view is: worry about the rest of the world now, and then worry about U.S. inflation later,” said Torsten Slok, chief international economist at Deutsche Bank AG in New York.

The moves by ECB President Mario Draghi and BOJ Governor Haruhiko Kuroda “have gotten deep into the psyche of Fed officials,” said the  chief financial economist with Bank of Tokyo Mitsubishi UFJ Ltd. in New York.

-“The world’s problems are not over yet, and until someone upgrades the growth forecast, the already reluctant Fed is unlikely to strike out very far on its own.”

-“We will use all policy tools — monetary, fiscal and structural — individually and collectively to achieve these goals,” G-20 officials said in their communique on Feb. 27. “Monetary policies will continue to support economic activity and ensure price stability, consistent with central banks’ mandates, but monetary policy alone cannot lead to balanced growth.” – said  J.Yellen 

A slower pace of Fed rate hikes is critical for emerging markets which are already struggling with low commodity prices and dollar-denominated corporate debt, said Michael Arone, chief investment strategist at State Street Global Advisors in Boston.

“Emerging markets make up 40 percent to 50 percent of global gross domestic product.      Monetary policies can “buy time” for politicians to put in place fiscal and structural policies that can boost economic growth.  

-“The problem is that is not happening at a pace people would like.”


J.Mason ♦