Fed Takes Itself Out of the Picture
Nine months ago, the global economy faced two key risks. First, there was genuine concern that the Federal Reserve (Fed) might tighten too aggressively. At the time, the Fed was engaged in steady policy normalisation with quarterly rate hikes and balance-sheet reduction, and providing guidance towards three further rate hikes for 2019. Second, the imposition of 10% tariffs on $200billion of Chinese goods had ignited concerns that the trade dispute would escalate “on schedule” and the US would follow through with its threat to increase tariffs to 25% on January 1, 2019.
Given such clouds on the horizon, the subsequent market meltdown in late 2018 was understandable. But there was a silver lining: the episode served to sensitise policymakers to the fragility of the global economy. The Fed, for its part, made a dramatic U-turn, initially trimming one rate hike from the expected path in 2019. By March 2019, it had done away with the remaining two, essentially taking itself out of the picture with respect to possible hikes. In doing so, the Fed shifted from being a threat to the extension of the cycle to becoming an enabler of it. In ourview, having already hiked nine times in this cycle, the Fed can afford to be “patient” and even has scope to be “nimble.” Indeed, as trade tensions recently re-escalated, Fed Chair Jerome Powell emphasised that the Federal Open Market Committee stands ready to “act as appropriate” to sustain the expansion. Despite having made little progress on the road towards policy normalisation, other central banks have followed suit on this dovish tilt.