Fed View: New Vice Chair likely to support further gradual rate hikes – Overnight, the White House announced the nomination of Richard Clarida to the Vice Chair role of the Fed board, and Michelle Bowman to the board role chairing the subcommittee for community banks. Being board members, both would be voting members of the FOMC should they be approved by the Senate. Both nominees are establishment Republicans in their political leanings, having served in previous administrations in a policy capacity. While the monetary policy views of Ms Bowman are not yet clear, the Vice Chair role is by far the more important of the two, and the one where the implications for monetary policy are most apparent.
Richard Clarida is a career economist and long-time Columbia University professor, who has written extensively on monetary policy and, in particular, the evolution of the neutral rate and the relationship this has with foreign exchange markets. Particularly relevant is his 2015 paper ‘The Fed is Ready to Raise Rates: Will Past be Prologue?’ where Clarida stated that he believes the neutral fed funds rate lies in a 2-3% range, down from c.4% prior to the crisis, and that this was being driven by both the slowdown in US and global potential growth, and ‘an excess of global savings relative to desired investment opportunities’. He nonetheless argues that, with the economy likely to ‘run hot’ for a period, that it ‘seems plausible’ interest rates would rise above the neutral rate estimate in the current cycle, as it has done in prior periods when the unemployment rate has undershot the NAIRU estimate. His views are consistent with our expectation that the Fed will continue to hike at a quarterly pace until June 2019, ultimately taking the fed funds rate to an upper bound of 3%, modestly above the most recent FOMC projection for the long run neutral rate (2.9% as of the March projections). With fed funds futures markets still lagging our forecasts – pricing in just two further hikes this year against our view of three – we see scope for higher rate expectations to drive a rise in Treasury yields over the coming months. (Bill Diviney)
China Macro – Official growth steady at 6.8% yoy in Q1 – The Chinese economy started 2018 on a solid footing, despite drags from ongoing targeted tightening and rising risks from protectionism. Real GDP growth in Q1 came in at 6.8% yoy, unchanged from the pace seen in the previous two quarters. Growth was supported by consumption, with consumer confidence at a 25-year high. While industrial production and fixed investment slowed compared to January/February levels, retail sales growth picked up to 10.1% yoy (Jan/Feb: 9.7%). External demand also has proven robust so far, as rising trade frictions with the US have not (yet) affected Chinese exports. Moreover, real estate markets showed some signs of stabilisation, after an ongoing slowdown last year. With volatility of official growth remaining low, it is worthwhile to look at other growth estimates as well. Bloomberg’s alternative monthly GDP estimate remained strong at almost 7% in March, although slightly below the average level for January-February (7.1%). Looking forward, we still expect the Chinese economy to resume a gradual slowdown in the course of this year, with official growth slowing from 6.9% in 2017 to around 6.5% in 2018 and alternative growth measures dropping moderately as well. See for more background our China Watch – Growth steady, trade risks rising published earlier today (Arjen van Dijkhuizen)