William De Vijlder

Group Chief Economist BNP Paribas

Fiscal and monetary policy

William De Vijlder examines fiscal and monetary policy through the lens of government and central bank decisions (including the ECB, the Federal Reserve and the Bank of England), with a special focus on changes in a country’s budget balance and public sector debt.

dollar

Federal Reserve: Monetary policy self-assessment

The Federal Reserve will conduct a review of its monetary policy framework and the conclusions will be made public in the first half of 2020. Three questions will be addressed: should the monetary policy stance take into account past misses of the inflation objective? Are the tools adequate? How can communication be improved? The initiative should be welcomed because it shows the Fed’s efforts for being ready when the next recession hits. Facing similar challenges, the ECB is likely to be interested in the outcome of the Fed research.

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decision

US: Fed turning a corner, but into which direction?

Although US growth remains strong, global headwinds, softer survey data and tighter financial conditions have put the FOMC in risk management mode. Policy remains data dependent, but a patient stance will be adopted before deciding on the next move in monetary policy Inflation, which remains well under control, facilitates this wait-and-see attitude. Markets are now pricing in a policy easing in the course of 2020. More than anything else, this shows to which extent uncertainty has taken its toll on confidence.

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crisis

United States: The Powell put

Fed chairman Powell has recently emphasized that the FOMC will be patient given the muted inflation reading and that it is ready to shift the policy stance swiftly if required. He also considers that financial markets are pricing in downside risks well ahead of the data. This means that they are too pessimistic on growth Professional forecasters’ estimates of the probability of entering into recession in the coming quarters do not display the typical pre-recession dynamics either.

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ECB

ECB: From quantitative easing to quantitative pausing

As expected, the ECB Governing Council has decided to end the net purchases in the context of its asset purchase program. This new phase can be called quantitative pausing, before eventually moving to quantitative tightening, i.e. to shrink the size of the balance sheet. The end of net purchases increases the role of forward guidance as an instrument to control interest rate expectations. The enhanced forward guidance, i.e. continuing to reinvest for an extended period past the first rate hike, should be welcomed.

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resilience

Eurozone: Strengthening resilience

Support seems to be growing for the proposal of France and Germany for a eurozone budget. This would contribute to a much needed enhancement of economic resilience, that is the ability to cope with shocks. Resilience can also be strengthened through private and public risk sharing and policies seeking to boost potential growth. Boosting resilience is all the more important considering that risks to global growth seem to be tilted to the downside.

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William De Vijlder

The strange debate about central bank independence

Is central bank independence under threat? The question may seem strange. After all, central bank independence has been instrumental in bringing down inflation and inflation expectations in the 80s and 90s and monetary policy has been successful in bringing lasting recovery from the Great Recession.

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William De Vijlder

Bank of Japan: limits to QE?

The Bank of Japan introduced quantitative easing back in 2001 after having adopted a zero interest rate policy in 1999. Almost two decades later, inflation remains well below target despite a balance sheet which is now as big as Japan’s GDP

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Japon

Central banks: An effective upper bound to QE?

The balance sheet of the Bank of Japan is equivalent to the country’s GDP, yet inflation remains stubbornly low compared to the official target. Years of quantitative easing have caused distortions in equity markets and weighed on liquidity in the market for JGBs. Concerns would go well beyond Japan and cause doubts about the effectiveness of more QE.

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Federal Reserve

United States: Data-dependent discomfort

Recent indicators point towards ongoing strong US growth. The non-manufacturing ISM index has caused a jump in treasury yields: data-dependent forward guidance implies that investors expect the Fed will not remain passive when data are particularly strong. Growth outside the US is slowing yet higher US yields have been mimicked across the globe. The dollar has also strengthened which is unwelcome news for corporates in developing economies which carry a lot of debt in USD.

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Fed: the Phillips curve is flat

Fed chairman Jerome Powell made important comments during his press conference. Fiscal policy is on an unsustainable path and lasting widespread tariffs would be bad for the US and the world. Monetary policy remains accommodative and data-dependent. Markets liked the dovish bias in the message.

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Fed: Avoiding the risks of stargazing

In assessing its monetary policy stance, the Fed pays attention to differences between realised and target inflation, unemployment and its natural rate, the policy rate and its neutral rate. Estimates of these reference points are highly uncertain. For this reason the Fed adopts a pragmatic approach based on data-dependence and gradualism: dovishness still prevails.

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Fed building

Fed: Market considers tightening cycle is well advanced

Recent Federal Reserve research shows that the slope of the short end of the yield curve is a more reliable indicator than the commonly used difference between 10-year and 1 or 2-year US Treasury yields. In a similar vein, we can look at the difference between the forward 3-month LIBOR rate and the spot rate. This difference has increased as of late. However, the level and shape of the entire forward curve show that the market is of the view that the Fed tightening cycle is well advanced.

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ECB

ECB: nervousness postponed

Skilful expectations management meant that the announcement of the end of the net purchases of the QE program didn’t cause any stirs. Markets have applauded the introduction of date and state dependent guidance. In the course of next year, nervousness will increase again as investors will wonder whether conditions are met to warrant a first rate hike in this cycle.

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Balancier

Constraints on monetary policy push towards unconstrained investing

February’s surge in volatility, the recent dip in the eurozone’s growth momentum, the prospects of a series of US key rate hikes and of the ECB’s change of tone as it prepares to halt quantitative easing (QE) are all factors that risk intensifying arguments in favour of high conviction approaches to asset management in the months ahead: unconstrained investing makes a comeback.

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