Date: November 12, 2018
United States:
Fed Risks Backlash Reining in Economy Congress Wants to Rev Up
The guardian of the punch bowl is at risk of becoming the punching bag. The Federal Reserve continued to signal at its meeting Thursday that “further gradual increases” in interest rates are coming for the “strong” U.S. economy. It’s a message that could be increasingly unpopular as Democrats and Republicans seek more spending next year while gearing up for the 2020 fight for control of Congress and the White House. Democrats soon to be in command of the House of Representatives are pushing for infrastructure spending and a wider distribution of gains to workers from a hot job market. Republicans want economic growth to accelerate from their tax cuts, deregulation and defense spending. Steadily rising interest rates can appear contrary to both goals. Caught in the middle is Fed Chairman Jerome Powell, who’s already taking flak from President Donald Trump for boosting borrowing costs while the economy is humming. Powell, perhaps anticipating even more political heat, is being proactive in his outreach to Congress, which has oversight of the central bank: He has met with or called lawmakers 77 times since becoming chairman in February, according to his calendar. During September alone, a busy month that included a policy meeting, his diary shows 18 meetings or telephone conversations with congressional members. “On the House front, there will definitely be more criticism. They will say clearly we have good outcomes, so what’s the hurry?” said Edward Al-Hussainy, a senior analyst for interest rates and currencies with Columbia Threadneedle Investments. “On the Republican side, the question will be, ‘If we roll out more stimulus, are you going to offset it? That doesn’t work for us.”’ The reality is, both parties need to preserve the investing public’s trust in the Fed to underwrite their political goals. Without sound monetary policy that keeps inflation in check, neither wage gains nor moderate borrowing costs on growing federal debt are sustainable.
Europe:
Italy’s Industry Output Drop Makes It Harder to Convince EU
Italian industrial output fell less than expected, though the decrease will weaken the government’s budget arguments with a skeptical European Union. Italy faces a Tuesday deadline to respond to EU objections to the populists’ draft budget for 2019. Officials in Brussels say the growth rate of 1.2 percent they foresee won’t sustain Italy’s expansive program. Industrial production dropped 0.2 percent on a monthly basis in September, smaller than the median estimate of a 0.5 percent drop in a Bloomberg survey of 19 analysts. Industrial production contracted 0.2 percent on a quarterly basis in the third quarter, national statistics agency Istat said Monday in Rome. The output decline adds to signs of an economic slowdown in the final three months of this year that may well spill over into 2019. The economy stalled in the third quarter while Istat last week highlighted “the persistence of a weak phase in the economic cycle.” The government’s plans to cut taxes and increase benefits are testing investors’ risk tolerance, while running afoul of EU rules with its 2.4 percent deficit target. “I hope we will come up with a common solution, but if you’re talking about splitting things down the middle — I don’t see how that’s possible,” EU Economics Commissioner Pierre Moscovici said Thursday. “We need to get closer together, but we need to respect the rules.” From a year earlier, Italy’s work-day adjusted production rose 1.3 percent in September, Istat said. Capital goods fell 1.6 percent in September, contributing the most to the monthly contraction.
Asia:
China Expected to Expand Budget Deficit Amid Trade War Risks
China’s policy makers are expected to increase the budget deficit in the coming year, as a slowing economy and the downdraft from the trade war with the U.S. raise the need for a more active fiscal policy. Authorities will increase the budget deficit target to between 2.6 percent and 3 percent of economic output, up from 2.6 percent this year, according to 21 of 28 economists in a Bloomberg survey. The remainder forecast a deficit higher than 3 percent of gross domestic product. The quota for off-budget government bonds — used in particular to finance stimulus via infrastructure investment — will be at least 1.35 trillion yuan ($194 billion) — the same or higher than this year, the survey showed. China’s economy slowed more than expected in the third quarter as a funding squeeze combined with the uncertainty brought about by the trade war with the U.S. While policy makers have taken a series of steps to shore up the expansion, from easier credit policy to multiple cuts to banks’ reserve requirement ratios, high debt levels make broad-based stimulus less likely. China’s policy makers are expected to increase the budget deficit in the coming year, as a slowing economy and the downdraft from the trade war with the U.S. raise the need for a more active fiscal policy. Authorities will increase the budget deficit target to between 2.6 percent and 3 percent of economic output, up from 2.6 percent this year, according to 21 of 28 economists in a Bloomberg survey. The remainder forecast a deficit higher than 3 percent of gross domestic product. The quota for off-budget government bonds — used in particular to finance stimulus via infrastructure investment — will be at least 1.35 trillion yuan ($194 billion) — the same or higher than this year, the survey showed. China’s economy slowed more than expected in the third quarter as a funding squeeze combined with the uncertainty brought about by the trade war with the U.S. While policy makers have taken a series of steps to shore up the expansion, from easier credit policy to multiple cuts to banks’ reserve requirement ratios, high debt levels make broad-based stimulus less likely. “For the coming period, China has a very difficult act to balance between reining in domestic risks, for example in terms of excessive debt, and keeping growth on track in order to secure social and financial stability,” said Bjorn Giesbergen, an economist at Rabobank.