Reuters – Now for more on what’s expected from the Fed, I am joined by William de Vijlder, Group Chief Economist at BNP Paribas. William, hello and thank you for joining us. Is it time for the Fed members to update their interest rate projections known as the “dots”?
William De Vijlder – Well that is at least what I would advocate, the reason being that we have seen significant change compared to the previous release in the dots, the speed of the vaccination campaign but also the 1.9 trillion package. So I would say this should warrant change in the guidance on where the dots are given where the Fed’s rate will be in 2023
Reuters – and we are expecting very positive economic forecasts from the Fed including perhaps the highest GDP forecast in 23 years. Is this going to put Jerome Powell under pressure to explain how monetary policy can remain so loose until the US returns to full employment?
WdV – It is going to raise questions indeed because dots, like other types of policy guidance tools are very easy means of communication if there is not a lot of change. But if you go through a period of accelerated change like we are experiencing at this juncture and will be experiencing for the foreseeable future, then it creates a kind of a dilemma. Will Powell say “well we are relaxed about inflation outlook and there is no need to change the dots” or, if there is a need to change or the dispersion of the dots or if the individual projections widen, it could be perceived as kind of throwing oil on the fire and could even fuel more nervousness on the world markets
Reuters – what about the global spillover from US monetary policy, those higher US bond yields are causing higher yields in the Eurozone where economic recovery isn’t quite on the same track
WdV – Indeed, as usual, spillover from the US is always an important factor. You mentioned Europe but we should also look at developing economies as well. Focusing on Europe, there is a clear desynchronization between Europe and the US in terms of the vaccination campaigns, and the number of people and speed of vaccination, but also in economic developments and what that means is that we cannot afford to have a significant increase in bond yields depending on the economic momentum. Fortunately we have the ECB continuing its pandemic emergency purchasing programme (PEPP). But let’s say that communications from the ECB last week were not sufficiently overwhelming in that they said “we’ll step up the purchases” but then the insistence that “we will do this for a quarter and then will see” means there remain diverging views within the Governing Council on the necessity to keep a lid on government bond yields in Europe
Reuters – thanks very much, William De Vijlder Group Chief Economist at BNP Paribas
