FIG Topics of Interest



“We need to make sure inflation doesn’t keep slipping down toward zero, because then the central bank really does have less and less ability to react to downturns,’’ Fed Chairman Jerome Powell said during a Q&A at Stanford University on March 8.
Fed officials have long called their 2 percent inflation target “symmetric,” but now they want you to know they really mean it. They’re so concerned that policy makers are contemplating creative, and politically risky, strategies for raising long-run inflation rates.
Put simply, many economists believe inflation outcomes are heavily influenced by what ordinary people expect inflation will be. Testifying before Congress on Feb. 26, Powell called inflation expectations “the most important driver of actual inflation.”

In theory, this works through two channels: consumption and price setting. If millions of people expect inflation this year will rise substantially, eating away at the purchasing power of their incomes, consumers and businesses will bring forward spending and investment decisions. At the same time, workers will ask for higher wages and firms will raise prices. The higher demand, plus higher wages and prices, will help generate the inflation that’s anticipated.
The concept explains why central bankers have made supreme efforts since the 1970s and ‘80s to establish their credibility in controlling inflation. Once the public trusts in that commitment, expectations for inflation won’t respond significantly to shocks, like a big jump in energy prices or a sharp drop in unemployment, thereby helping to anchor actual inflation at a low level.

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“Put the Federal Reserve pause, trade truce, and China stimulus together and we’re looking for a trough in the first quarter and very moderate pick up ahead,” said Tom Orlik, chief economist at Bloomberg Economics.
IHS Markit’s indicator of global growth rose in February from a 28-month low and, encouragingly, there was an improvement in the gauge of demand. Its measure of worldwide services also picked up in February for the first time in three months. Citigroup’s surprise index for the euro area -- which has been one of the weak spots of the global economy -- has rebounded to its best reading in almost five months.

In China, a measure of new orders in the manufacturing Purchasing Managers Index improved last month, and Germany got good news about an increase in water levels on the River Rhine. A drop last year disrupted barge traffic, hitting industry and adding to the temporary factors that pushed the economy near a recession.
“Global trade fears are overblown, as are concerns that global growth may slow significantly,” according to Robin Brooks, the IIF’s chief economist.
The International Monetary Fund is still predicting global growth of 3.7 percent this year and 3.5 percent in 2019, a pretty good clip for this stage of the expansion. Deutsche Bank strategist Alan Ruskin also argues there is reason to be more upbeat than the headlines suggest. China’s economy, for example, is five times its size in 2000, meaning a 6 percent growth rate now is equivalent to 30 percent back then.

“When making even longer-term comparisons, absolute levels and changes become even more important than the limited perspective provided by percentage changes,” he wrote in a note to clients this week.

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“This is no way to run a country,” Carolyn Fairbairn, director general of the Confederation of British Industry, told the BBC. “What we are potentially going to see is this imposition of new terms of trade at the same time as business is blocked out of its closest trading partner. This is a sledgehammer for our economy.”
The U.K. will avoid imposing tariffs on most imported goods in the event of a no-deal Brexit, though officials said prices of key European Union products including beef, cheese and cars will rise.

The government said Wednesday its “balanced approach” aims to offset a spike in prices that consumers would experience in a no-deal departure as a result of the falling pound and higher costs of imports. But a major U.K. business lobby described it as a “sledgehammer” for the economy.
The announcement comes after Parliament overwhelmingly rejected Prime Minister Theresa May’s Brexit deal for a second time Tuesday night, and lawmakers are expected to vote Wednesday to rule out leaving the EU without a deal -- a scenario the premier herself accepted would cause “damage” to the U.K. Revealing the government’s no-deal planning so close to the vote will be seen by many MPs as a strategy to focus minds.

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President Donald Trump’s "I LOVE YOU!" tweet to farmers is facing another challenge: Budget cuts that will slash subsidies for crop insurance and small growers.
Trump’s 2020 budget, released Monday, calls for a 15 percent funding drop for the Department of Agriculture, citing “overly generous” subsidies. The president is seeking one of the largest-ever cuts to domestic discretionary spending in a $4.7 trillion fiscal 2020 budget proposal that also boosts defense spending and adds $8.6 billion for building a border wall.
Trump’s budget “proposes that USDA responsibly and efficiently use taxpayer resources by making targeted reforms to duplicative programs and overly generous subsidy programs,” according to the document.
The plan would trim the USDA budget by $3.6 billion to $20.8 billion, lowering subsidies for crop insurance premiums to 48 percent from 62 percent, and limiting subsidies for growers who make less than $500,000 annually.

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President Donald Trump on Monday will ask lawmakers to hike spending for the military and the wall he wants to build on the U.S.-Mexico border and slash other programs in his 2020 budget, the opening move in his next funding fight with Congress.
The Republican president’s proposal, slated for release at 11:30 a.m., is expected to be rejected by Congress, where Democratic leaders on Sunday warned Trump against what they called a “repeat performance” of last year’s funding war, which led to a five-week partial shutdown of the federal government.

This year, the stakes are higher. The Oct. 1 deadline for a funding deadline to keep the government running coincides with the deadline to lift the debt limit

Trump’s budget will ask for $8.6 billion to build a wall on the southern border with Mexico, officials familiar with the budget told Reuters.

That is more than six times what Congress gave him for border projects in each of the past two fiscal years, and 6 percent more than the president has corralled by invoking emergency powers this year after he failed to get the money he wanted.

Immigration enforcement, veterans’ healthcare and opioid addiction programs will get a boost in the budget. But Trump will propose to cut non-defense spending by an average of 5 percent below caps that Congress had set for fiscal 2019, the White House Office of Management and Budget said on Sunday.
Trump will propose to boost defense spending by an as-yet-unspecified amount in fiscal 2020. But to get around the spending caps, those increases will be funneled through the Overseas Contingency Operations (OCO) fund, more traditionally used for emergencies.
The tactic has already drawn criticism from fiscal hawks. “We’ve long argued that OCO is a gimmick,” said Romina Boccia, who specializes in fiscal and economic policy at the Heritage Foundation, a conservative think tank.

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“Wealthy, wealthy countries that we’re protecting are all under notice,” Trump said in a speech at the Pentagon on Jan. 17. “We cannot be the fools for others.”
Under White House direction, the administration is drawing up demands that Germany, Japan and eventually any other country hosting U.S. troops pay the full price of American soldiers deployed on their soil -- plus 50 percent or more for the privilege of hosting them, according to a dozen administration officials and people briefed on the matter.
In some cases, nations hosting American forces could be asked to pay five to six times as much as they do now under the “Cost Plus 50” formula.

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"A new series of quarterly targeted longer-term refinancing operations (TLTRO-III) will be launched, starting in September 2019 and ending in March 2021, each with a maturity of two years," the ECB said in a statement."
The TLTROs are basically loans that the ECB provides at cheap rates to banks in the euro area. As a result, lenders can provide better credit conditions to customers, which in turn stimulates the real economy.
The 19-member region has been overshadowed by political developments in Italy, which entered a technical recession at the end of 2018; and in the U.K., where the departure from the EU has yet to be finalized. There are also concerns about a potential slowdown in the Chinese economy, given the reliance on exports to the country.
"The persistence of uncertainties in particular relating to geopolitical factors and the threat of protectionism is weighing on economic sentiment," ECB President Mario Draghi said in January, following a monetary policy meeting.

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“The global expansion continues to lose momentum,’’ the Paris-based Organization for Economic Cooperation and Development said as it downgraded almost every Group of 20 nation’s economy. “Growth outcomes could be weaker still if downside risks materialize or interact.”
“Getting a clear steer on global growth is very difficult right now, but at least, the latest PMIs have some positives,” HSBC economist James Pomeroy said in a note on Wednesday.
While central banks should stay in expansionary mode, the group called for structural reforms and fiscal stimulus in the European countries that could afford it, saying that “monetary policy alone cannot resolve the downturn in Europe or improve the modest medium-term growth prospects.”
The OECD cut its growth outlook for this year to 1 percent from 1.8 percent. ECB policy makers are meeting in Frankfurt this week, and the OECD said they should signal a delay to any rate hikes and possibly implement new measures to improve funding for banks. Both measures are expected to be discussed in Frankfurt on Thursday.
Europe took the brunt of the downgrades. While the U.S. outlook was lowered slightly, the U.K.’s 2019 forecast was cut to 0.8 percent from 1.4 percent, and Germany’s to 0.7 percent from 1.6 percent.
The OECD also singled out Brexit as one of the persistent threats. If the U.K. doesn’t secure a deal, it sees a risk of a near-term recession, with “sizeable negative spillovers” on other countries.

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The Trump administration notified Congress on Monday that it wants to scrap trade concessions for India, the largest beneficiary of the so-called generalized system of preferences that impacts $5.7 billion worth of goods.
Both Trump and Modi likely hope to isolate thorny trade issues from their geopolitical ties as both countries position themselves in Asia against an increasingly assertive China. But even assuming the strategic alliance -- which includes the so-called Quadrilateral Security Dialogue between the U.S., India, Japan and Australia -- remains intact, the world’s two largest democracies are probably still headed for a bout of turbulence.
Even if Modi doesn’t want to raise the temperature, “the discourse in this country has been that America needs India to balance China,” said Harsh Pant, an international relations professor at King’s College London. “And the question will be: Why is America doing this to India?"
“It is extraordinary how Trump manages to demarcate trade from geopolitics, when in the real world they are intimately linked,” Blaxland said.

That extends to the U.S. pulling out of the Trans-Pacific Partnership trade deal that would have more closely tied Asian economies to Washington, despite pleas from regional allies such as Japan to reconsider, Blaxland added. “The TPP was dismissed, just as trade links with India and Turkey now appear set to be discarded,” he said.
Trump’s removal of trade concessions are not entirely unwarranted, coming after Indian customs duty hikes, expanded import substitution rules and domestic price caps, according to Richard Rossow, Wadhwani chair in U.S.-India policy studies at the Washington-based Center for Strategic and International Studies.
The current spat follows previous U.S. attempts to pressure New Delhi to draw down significant oil imports from Iran, as well as Venezuela. India -- whose history of non-alignment gives it close economic partners that make Washington policymakers uncomfortable -- has nevertheless increased oil, natural gas and coal imports from the U.S.

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The U.S. and China are close to a trade deal that could lift most or all U.S. tariffs as long as Beijing follows through on pledges ranging from better protecting intellectual-property rights to buying a significant amount of American products, two people familiar with the discussions said.
Chinese officials made clear in a series of negotiations with the U.S. in recent weeks that removing levies on $200 billion of Chinese goods quickly was necessary to finalize any deal, said the people, who weren’t authorized to talk publicly about the deliberations. That’s the amount the Trump administration imposed after China retaliated against the U.S.’s first salvo of $50 billion in tariffs that kicked off the eight-month trade war.
One of the remaining sticking points is whether the tariffs would be lifted immediately or over a period of time to allow the U.S. to monitor whether China is meeting its obligations, the people said. The U.S. wants to continue to wield the threat of tariffs as leverage to ensure China won’t renege on the deal, and only lift the duties fully when Beijing implemented all parts of the agreement.

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