This evening will see the Federal Reserve conclude its most recent 2 day meeting and with it, probably reduce the amount of stimulus that they are pumping into the US on a monthly basis. Most economists are expecting that we will see some token form of stimulus reduction; probably in the ball-park of $5-10bn.
The Fed’s plan for tapering stemmed from their June meeting during which Ben Bernanke spoke of the FOMC’s desire to, "moderate the monthly pace of purchases" should we see "continuing gains in labor markets, supported by moderate growth that picks up over the next several quarters as the near-term restraint from fiscal policy and other headwinds diminishes". Their argument will be that we are on that glide path at the moment.
We would pick holes in this by saying that the pace of job creation in the US has actually slowed since May, whilst growth is likely to take a knock from upcoming budget negotiations and possible further spending cuts or a government shutdown. Emerging markets still find themselves in difficulty as well and global aggregate demand can’t be counted on to bounce back promptly. The fact that the Fed is likely to cut its rate expectations whilst cutting stimulus is one thing I will never quite understand.
The announcement is due tonight at 7pm and will be followed by a press conference to explain their decision making process. If the Fed are dovish, cut a little and reinforce forward guidance, USD could easily weaken on the announcement.
Yesterday’s inflation data showed that we’re getting growth in the UK without too many price pressures. The slack in the UK economy following years of weak performance will take time to improve and with that comes fairly benign price activity. Recent strength in sterling markets has also helped offset increase in oil prices that occurred during the escalation of tensions around the Syrian conflict.
Unfortunately while this will be good news for Mark Carney and the team at Threadneedle St, given the inflationary caveats to their forward guidance plan, to the man in the street experiencing wage increases at only 1%, this still means that life and spending decisions remain tough and, in reality, talk of a recovery remains merely talk.
The Bank of England will take the central bank stage this morning with the publication of the latest round of meeting minutes. Given the outperformance of recent UK data, some divergence in members expectations may very well be present. Martin Weale dissented last month on the basis of the inflation ‘knock out’ to forward guidance and we would expect to see some of the more hawkish members of the committee expressing some concern.
