The Bank of England has told us time and time again that pay growth is key to the interest rate outlook.
Greece made a 750 million euros repayment to the International Monetary Fund a day ahead of schedule on Monday but it is not clear precisely how much money Athens has left in its coffers.
San Francisco Fed President John Williams believes deeply that monetary policy is data-dependent, so much so that he has printed the mantra on T-shirts that he is giving away coast to coast. On Friday at Chapman University in Orange, Calif., however, he didn’t discuss the current state of U.S. economic data or the stance of monetary policy. Instead, he focused on why forcing the Fed to follow a strict monetary policy rule to make interest rate decisions would be, well, a problem (http://reut.rs/1bmCfvB). It’s a view that a number of his colleagues, including Fed Chair Janet Yellen, have publicly embraced. Monetary policy — it’s independent. Sounds like something you could put on a T-shirt.
Fed officials say they will be “data-dependent” when it comes to making monetary policy. San Francisco Fed President John Williams feels so strongly about it, he’s even printed up a T-shirt to get that message across. But truth be told, data-dependency is not as objective as it sounds. Data doesn’t dictate policy; it’s the interpretation of data that’s key. What is rate-hike-worthy data to one policymaker is keep-the-pedal-to-the-metal data for another. Take, for instance, U.S. GDP growth. Richmond Fed President Jeffrey Lacker says he expects GDP growth to average 2 percent to 2.5 percent this year, a pace that would justify a Fed rate hike in June. Chicago Fed President Charles Evans expects 3 percent growth this year, and does not believe even that would justify a rate hike until the first half of 2016. So what does it tell you about monetary policy if you see GDP growth of 2.5 percent? Not a whole lot, judging from these two. And the statements of other Fed officials are hardly more helpful. Indeed, as Atlanta Fed President Dennis Lockhart said recently, “I don’t think it is advisable to approach such a decision with rigid quantitative triggers in mind.” Watch the data, sure. But don’t assume the data will tell you much about the exact timing of the rate hike. Monetary policy – it’s subjective. Maybe some policymaker will print that on a T-shirt.
The Bank of Canada will almost certainly hold policy steady on Wednesday but nearly half of the banks who do business directly with it predict at least one more rate cut this year.
For all the measures India’s central bank has taken to increase transparency in policy making, predicting rate moves by Governor Raghuram Rajan is still difficult.
Despite the Federal Reserve’s trillions of dollars in newly printed money, workers’ wages and overall U.S. inflation have failed to take off since the recession. Longer-term borrowing costs, from 10-year Treasury yields to 30-year home mortgages, have also compressed without any real signs of reversing. While this has perplexed many economists, transcripts of the U.S. central bank’s crisis-fighting meetings in 2009 show that Janet Yellen, then the head of the San Francisco Fed, was prescient in warning colleagues of these very problems.
The Federal Reserve faces two big challenges in the months and years ahead: how to finally “liftoff” after more than six years of rock bottom interest rates, and how to begin drawing down its $4.5-trillion balance sheet after three massive rounds of bond purchases. But, it turns out, those questions were being raised at the U.S. central bank as far back as 2009.