Welcome to the first day of the non-ZIRP (Zero Interest-Rate Policy) for the United States since December 2008. The reason for this is contained in the announcement below by the US Federal Reserve from yesterday evening.
Effective December 17, 2015, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/4 to 1/2 percent,
Actually use of the term ZIRP is slightly loose as the Fed Funds rate had been mostly between 0.1% and 0.15% but near zero has come to mean the same thing. Looking forwards it seems set to be in the range 0.35% to 0.4% as the Federal Reserve enforces its policy.
Quite a few people have asked me about this so just to be clear Fed Funds is an overnight interest-rate which fluctuates with conditions these days. The US also has a fixed rate which is shown below.
raise the interest rate paid on required and excess reserve balances to 0.50 percent,
The latter of course is the same as Bank Rate in the UK by chance now and frankly as we move forwards Janet Yellen may regret the decision in which she was involved to let Fed Funds “float” but that is done now. It was unlikely to be changed on the first raise as if by chance it did then upset the apple cart it would be quite an own goal.
What happens next?
According to the projections of the US Fed – the dot plot matrix – we can expect an interest-rate rise around every quarter in 2016. We also got an addition to the language used as the word “gradual” came into play as a description of this. Of course as we have seen with both “temporary” and “transitory” central bankers have their own private language so some care is needed.
The markets probably mindful of the various false dawns and Fed promises in 2015 downplayed this and set the two-year bond yield at 1%. So they currently price in only a couple of moves at the most.
As you might expect from a move that had more trailers than A Force Awakens markets were rather nonplussed. Equity markets have responded positively and the US Dollar has risen but in essence the US government bond market went “meh”. Indeed the 30 year yield used to set many fixed rate mortgages moved lower to 2.95% as it tried to digest the meaning of “gradual”.
If we look to commodity markets then prices fell again but that is the current norm so we end up with Janet Yellen going to bed fairly happy on day one.
What about the Bank of England?
The obvious question as the United States raises interest-rates is what will the Bank of England do? If we go through an economic checklist we see quite a few similarities. For example economic growth is not only similar but is expected to be as the NIESR expects 0.6% quarterly growth for the UK and the Atlanta Fed expects just under 0.5% for the US. If we move to unemployment we have 5.2% for the UK and falling compared to 5% and falling for the US. Here we have to factor in that the participation rate in the UK has not dropped in the way that the US one has. If we move to wages yesterday we were told US real weekly wages had risen by 1.8% and on Tuesday we were told that UK real wages were rising at 2.4% on our monthly measure. The only real difference is that the United States recovered the ground lost in the credit crunch more quickly whereas the UK only picked up from 2013.
If we move to consumer inflation we see a similar pattern with US CPI at 0.5% and the UK CPI at 0.1%. The similarity in terms of name is misleading as they are rather different measures as the US has a high weighting for owner occupied rents which the UK tries to believe does not exist! Once you allow for what is called “shelter” in the UK rising at an annual rate of 3.2% then the picture ends up being rather similar.
We know that he is a “dedicated follower of fashion” except he has a problem right now as I pointed out last night on Twitter.
Somewhere a dedicated follower of fashion called Carney is wondering do I follow Yellen or Draghi?!
So he could raise 0.25% or cut 0.1%! If in his spinning around he thought he might wait and see what others would do well he will find himself in a land of confusion. From Bloomberg.
Hong Kong’s key rate was raised to 0.75 percent Thursday…..Taiwan lowered the benchmark discount rate by another 12.5 basis points to 1.625 percent, it said in a statement in Taipei on Thursday……Norway’s central bank has maintained its key rate at 0.75 percent
Yep, we have seen a raise, a cut and an unchanged for interest-rates already! Will nobody give poor Mark a clear lead? Will the Forward Guidance mark 9 which was only launched on Tuesday in the Financial Times be replaced by marks 10 and 11?
Retail Sales catch light again
This morning the debate has shifted again and let me remind you of the UK’s economic past. If we have a sweeping generalisation then we have excess consumption often driven by booming house prices (check) which leads to balance of payments problems (check) as we suck in imports to feed the need. Okay so how is consumption doing?
Compared with October 2015, the quantity bought in the retail industry is estimated to have increased by 1.7%.
Quite a surge as we wonder about the impact of what is called Black Friday so let us look further back.
Year-on-year estimates of the quantity bought in the retail industry show growth for the 31st consecutive month in November 2015, increasing by 5.0% compared with November 2014.
So we are reminded of a typical Eurovision entry along the lines of “boom,bang a boom”.
Regular readers will recall that I pointed out in January 29th that this looked likely to be a good year for UK (and Irish and Spanish) retail sales and we see that this has come true. Indeed with commodity prices falling again and therefore real wage growth continuing this will push into the spring of 2016 now. How much is the impact? Well take a look at this.
Average store prices (including petrol stations) fell by 3.3% in November 2015 compared with November 2014, the 17th consecutive month of year-on-year price falls.
I hope that those who pushed the “deflation” headlines with the implication of bad news at the end of last year and the beginning of this feel contrition. Also my argument that it was disinflation not deflation has also proven true.
But if we return to a comparison with the United States which has just raised interest-rates what is happening to retail sales there? From the UK ONS.
In its advanced retail sales estimates for November 2015, the amount spent in the US retail industry, including motor vehicles and parts and food services, increased by 0.2% from the previous month and increased by 1.4% compared with November 2014.
As you can see on this measure it should be the UK which should have raised interest-rates ahead of the United States. That is if any central banker these days still holds to the dictum that their job is to take away the punchbowl before the party really gets going.
Bank of England Governor Mark Carney has returned to home territory overnight by giving an interview to the Canadian public-service CBC network. We learned nothing about interest-rates which is odd you might think considering the Fed action. It was not as if they were short of time as there was plenty of time for some toadying.
Halfway into his term as governor of the Bank of England, Canada’s Mark Carney seems to be hitting his stride.
A bit of a long warm-up you might think! Also the more thoughtful might wonder how more “transparency” is provided by fewer Monetary Policy Committee meetings. But what we have in Forward Guidance mark 9 is a U-Turn on “around the turn of the year” for a Bank Rate rise. If we look at timing then there is another loose cannon on the decks as unemployment was supposed to fall below 7% next year thus raising the interest-rate question. Yet apparently at 5.2% it can safely be ignored. That is why we received an official denial this week that Forward Guidance is not working.
Thus an interest-rate rise looks still a long way away in the UK. Indeed if we look at our past history we wonder how an “emergency” interest-rate of 0.5% goes with retail sales rising at an annual rate of 5%?! They may be erratic but 2015 overall could not have been much stronger.
After all these years it is still afraid to move towards an exit strategy as I predicted back in the beginnings of this blog. Also I would point out that the US Fed still has problems too as its US $4 trillion balance sheet has become an ever more permanent part of the economic landscape.