- Fed clearly leads the global pace of policy normalization despite Trump 'displeasure'
- BoE wary of Brexit crash forcing it to slam on the brakes
- ECB coasting in neutral
- BoJ stuck in pit for repairs
The US Federal Reserve is likely to continue to outpace global central banks on the path toward policy normalization, amid expectations that the current state of central bank divergence will continue. Even recent criticism from President Donald Trump, who repeated that he wasn’t “thrilled” with Fed Chairman Jerome Powell’s plans to continue hiking interest rates, are likely fall on deaf ears as the central bank's FOMC minutes, released yesterday, indicated monitary policymakers intend to maintain their speed in the removal of accommodative policy.
Fed in the Forefront
With the American economy trucking along at 4.1% in the second quarter, the jobless rate having dropped back to 3.9% and inflation holding near the Fed’s 2% target, Powell has little reason to cause waves when he speaks on Friday at the Jackson Hole Economic Symposium. With the likelihood of a September hike already priced in, markets nonetheless await his remarks, in anticipation of any hints regarding the Fed's signals longer term plans.
Although the official schedule for the Jackson Hole event will not be released until late Thursday, the Fed has confirmed that Powell will deliver a speech titled “Monetary Policy in a Changing Economy” at 10:00 AM ET (14:00 GMT) on Friday. Fed fund futures put the probability of an additional increase in December at more than 60% as the U.S. central bank continues to through on its plans for the gradual removal of accommodative policy.
BoE Advancing, But Wary
The Bank of England is also on a gradual tightening plan, having increased rates to 0.75% at its last meeting in early August, on the back of a strong labor market and credit growth. But the BoE remains cautious, as uncertainty surrounding Brexit negotiations clouds the outlook with little progress ahead of the UK’s March deadline. “The economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal,” the BoE said in its last statement.
BoE governor Mark Carney stated that the bank’s forecasts were based on the assumption of a “relatively smooth transition” as the UK exits the European Union, leaving the BoE’s foot on the brake in case of Brexit fallout.
ECB Stuck in Neutral
The European Central Bank is also moving forward with policy tightening, albeit at a much slower pace. The euro zone monetary authority has already indicated plans to end its bond-buying program in December, but a weaker economy and unimpressive inflationary trends have also convinced the ECB to not move on rates until “at least through the summer of 2019”.
BoJ with problems in the pit
The Bank of Japan, meanwhile, seems to be lagging far behind the general tightening process as it last voted to maintain its ultra-loose monetary policy while cutting its view on inflation.
The Fed is clearly ahead of other major central bank efforts to return to policy normalization. Trump’s remarks aside, American economic data still supports the path of gradual rate hikes.
While trade talks continue to provide economic uncertainty for the US, the Fed looks certain to continue to lead the pack through the end of the year as its global counterparts lag behind. The Fed will likely reach policy normalization well ahead of its peers with the BoE’s foot tentatively hovering over the brakes, the ECB coasting in neutral and the BoJ stuck in park.