International Economics: IB Economics

Rising job creation in the US might have implications for the conduct of monetary policy, with the prospect of further rate cuts being delayed because of concerns about the level of aggregate demand in the economy. 

It will be interesting to see what the Federal Reserve will do.

Globally, it seems that there's going to be a loosening of monetary policy, with European and Canadian central banks are likely to lower rates to 3.75% and 4.75% respectively. 

This is likely to stimulate aggregate demand in these economies. 

Both the UK and the US are currently waiting for the next interest rate cut; however, it doesn't seem to be imminent in either economy because in both instances the respective central bank is nervous about the fact that inflation hasn't quite fallen far enough.

In the US inflation is currently 3.4%, but that's still 1.4% higher than the Federal Reserve's medium-term goal of 2%, and there's concern that inflationary pressure hasn't yet been driven out of either economy. 

Much like the UK, it seems as though the US is currently stuck in limbo, unable to decide whether to fully recover or not. Having seen the Federal Reserve keep interest rates at 5.25-5.5%, the latest US jobs data saw comparatively few new jobs created an unemployment rise. 

As a result, some are speculating that interest rate cuts might be back on the agenda sooner rather than later.

Hurrah! Europe has exited recession, with the big four economies -  France, Spain, Germany and Italy - helping push Eurozone growth for the first quarter to 0.3%, exceeding expectations. It seems that the prospect of falling inflation and accommodative monetary policy mean that it will slowly recover, although growth will remain moderate.

It seems that US interest rates aren't going to fall any time soon, according to one rate setter; this has wider implications for the global economy. Higher interest repayments on dollar-denominated debt, for a start and it also means that other central banks are likely to be wary when cutting rates.  

US inflation remains problematically high, and has actually gone up over the last month, driven by fuel and housing costs. As a result, the Fed are likely to be more reluctant to lower interest rates and this has implications for the conduct of monetary policy everywhere. 

This Bloomberg clip looks at Japan exiting negative interest rates, and the implications of this for the Japanese economy. It provides an excellent overview of how the end of the Japanese economic miracle led to decades of deflation, and decades of quantitative easing and negative interest rates. 

However, what does the decision to adopt positive interest rates have for the wider Japanese economy. It's an excellent piece of economic history and gives and insight into why deflation is so problematic, and difficult to overcome. 

A historic moment: for the first time since 2005, Japan has raised interest rates and they're no longer negative. Rates have gone from -0.1% to between 0.0 and 0.1% in response to a rise in inflation.

However, you have to wonder about the efficacy of a 0.2% rise in interest rates to 0.1% as a means of countering inflation. I suspect that it's the symbolism that's important, with the Bank of Japan saying that it's prepared to raise rates further, if need be. 

US inflation has nudged marginally higher, to 3.2% in February, compared to 3.1% in January. It comes at a time when the Federal Reserve are debating the future direction of monetary policy and the possibility of future rate cuts. 

Us inflation continues to fall, except, perhaps, not as quickly as commentators expected. The latest data has US inflation at 3.1%, and not dipping below 3% as expected.

It means that the Federal Reserve are more likely to exercise caution when determining the next interest rates decision. 

The Federal Reserve has held its benchmark interest rate at 5.25 - 5.5% in the face of the strong performance of the US economy and concerns that the economy hasn't yet completely rid itself of inflation. 

As a result, although rates are expected to fall by 0.75% in the course of the year, they've not come down yet and this has wider implications for the global economy, with other developed economies wondering whether to follow suit, not least the Bank of England, which announces its latest interest rate decision tomorrow.

Nigerian inflation has risen to nearly 30% in Nigeria, with food prices driving the rise in inflation. Even more remarkably in this context, the central bank hasn't set interest rates since the appointment of a new Governor, Olayemi Cardoso , in September. 

Given the circumstances, you would have expected interest rates to rise, and soon.

The Eurozone has seen the European Central Bank cut its interest rate, following a similar move by the Bank of Canada. The rate cut - to 3.75% from 4% - should provide a monetary stimulus to economic activity, although currently growth remains sluggish.

However, from a UK perspective, the question is whether this will prompt the Bank of England to follow suit. 

I've put this here - it could easily just be a Macroeconomic 'scoop' - however, it has universal applications. In short, Kenneth Rogoff argues that periods of economic uncertainty are likely to see higher than expected inflation because of the way that monetary policy is determined and an inflationary bias on the part of central banks.

But I'm not sure that this is much of an argument - yes, higher than anticipated inflation is a bad thing, but the costs of unemployment are higher than the costs of inflation - David Blanchflower is the man on this issue - so surely it's prudent to risk higher inflation than higher unemployment?

A slight easing of inflationary pressure in the US is going to see calls for a loosening of monetary policy, although I'd hardly call a fall from 3.4% to 3.5% significant, and indeed that seems to be the mood music emanating from the Fed. 

The Federal Reserve has stayed its hand, keeping interest rates unchanged at 5.25% to 5.5% because of a lack of progress towards reaching the inflation target. US inflation is currently 3.5% and has been stubborn in falling any further, so the Federal Reserve are cautious.

And what the Fed does, other central banks generally follow - Bagpuss economics, if you will - meaning that interest rates in the Eurozone and the UK might stay higher for longer too. 

Mixed data from the US: economic growth is good-ish, at an annualised rate of 1.6%, although lower than expected, but inflation for the first three months of the year is 3.4%. 

The latter means that there's little imminent prospect of the Federal Reserve cutting interest rates, and thus similarly little prospect of other central banks following suit.  

See what I mean? The Chairman of the Federal Reserve, Jerome Powell, has gone public expressing concerns about recent data - notably the uptick in inflation. He has appeared to suggest that interest rate cuts will be delayed until there are clearer signs that inflation and inflationary expectations are under control. 

The latest jobs data from the US illustrates that the economy is still rebounding at a decent pace, making it unlikely that the Federal Reserve are going to lower interest rates in the near future, because of fears that there still might be the prospect of inflation picking up.

The wider concern, is that this also implies that other economies are going to follow suit and it reduces the likelihood of short-term rate cuts elsewhere. 

Perhaps as a pre-cursor to tomorrow's Bank of England interest rate decision, the Federal Reserve have left US interest rates unchanged, reasoning that they need to see stronger evidence that inflation is under control before they lower rates. 

However, they're also of the view that they expect rates to fall from the summer onwards

Larry Elliott on the state of the global economy: more headwinds than tailwinds is his synopsis of the current state of play. He may well be right. 

The fact that inflation has exceeded forecasts and stayed at 2% - if only - is seen as concerning in Japan, where deflation has been the norm for most of the last 40 years. 

As a result, there's speculation that the Bank of Japan could take the hitherto unprecedented step of raising interest rates - which could even see them returning to a positive number by April.

The OECD is warning central banks that their race is not yet run as far as monetary policy is concerned, and that they need to keep their eye on the ball. And presumably stop mixing their sporting metaphors but that's for another day. 

Either way, they are concerned that bankers might be tempted into cutting interest rates earlier than would be optimal and perhaps stoking another burst of inflation, when tighter monetary policy might be more appropriate.

The US economy is growing strongly, at an annual rate of 3.3% in the last quarter of 2023, such that annual growth for the year reached 2.5%, compared to 1.9% in 2022.

Equally pleasingly, this has been achieved without inflation rising: it's currently 3.4% and there are hopes that the Federal Reserve might loosen monetary policy as a result.