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.

US: playing with privilege

Fiscal reflation in a full employment economy makes it very likely that the US current account deficit will increase alongside the budget deficit. Despite rising bond yields, fuelled by the prospect of increasing budget deficits and monetary tightening, the dollar has weakened.

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US: inflation unease

After the upside surprise to hourly wages earlier this month, the consumer and producer price inflation numbers have also come in higher than expected. Anticipating inflation dynamics has become very difficult, as the Phillips curve has become less apparent. This forces investors and policy makers to pay more attention to recent data than to long-term relationships.

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US rates and emerging markets – no spillover yet

Historically, a rising rate environment in the US has been a matter of concern for developing economies. It seems that this time is different: despite rising US yields, emerging market currencies have strengthened. This has contributed to a weakening of the effective exchange rate of the dollar and an easing of financial conditions in the US.

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EcoTV Week – 02/02/2018: Three perspectives on US economic policy

The combination of tax cuts and a still accommodative monetary policy should be very supportive for growth in the short run, all the more so given the easing of financial conditions (rise in equity market, weakening of the dollar). The longer run perspective is more sobering: limited potential to cut policy rates and a reduction of the fiscal policy space. Addressing growth slowdowns will be more challenging than ever.

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ECB forward guidance: well-intended vagueness

The ECB is upbeat on the growth outlook but considers that inflation remains subdued. Nevertheless, it still expects inflation to rise to 1.7% in 2020. The refusal to label this as being sufficiently close to its objective reflects a cautious attitude as well as an effort of being vague for a good reason.

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ECB: dovishly confident

The decisions of the Governing Council were in line with expectations but markets nevertheless reacted positively. In the spring of 2018, ECB watchers will increasingly focus on what comes after QE. On that matter, important questions were left unanswered during the press conference.

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ECB: Sintra’s syntax

The market reaction to the introductory speech of Mario Draghi at the ECB conference in Sintra was strong
This reflects a high degree of unease about the prospect of a policy normalisation.

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Monetary tightening: Doomed if you do, doomed if you don’t ?

Monetary policy normalisation is a balancing act: tighten too early could trigger a recession, hike too late could mean an inflation overshoot and a need to raise rates more aggressively. The reaction of financial markets adds to the complexity of the balancing act. Different factors have made the job of central banks more difficult in recent years.

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The art of negotiating (monetary) curves

“After a long straight, the driver downshifts and brakes slightly before going into a curve. When the curve proves to be tighter than expected, and with the car still cruising at high speeds, the driver hits the brakes harder. The wheels lock and the car skids out of control.” This metaphor seems to fit the challenges currently facing the US Federal Reserve

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Changing phases

Fiscal stimulus to an American economy at full employment is likely to trigger a tightening of financial and monetary conditions which in turn could affect growth prospects and investors’ appetite for risk. The route therefore looks well defined. It reflects a monetary policy which will gradually become more restrictive and will end up holding down growth.

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