Rate hikes are coming (episode 36)
- The US employment report seems to be sufficient for the Fed to raise rates. There is enough strength in the US labour market, there is enough strength in the US economy, and if the Fed wishes to control inflation eighteen months hence it needs to start acting today.
- What could stop the Fed? Financial volatility – but the Fed does not want to be perceived as being a hostage to the financial markets. This means the Fed would have to be convinced 1) hiking would increase volatility and 2) systemic risks from volatility would damage the real economy.
- China's approach to financial volatility was on display again with a further tightening of capital controls. There will be economic consequences - for instance, uncertainty over the direction of the currency may lead to under-invoicing of exports (better to convert later), distorting reported data.
- The G20 finance ministers gathered at taxpayers' expense over the weekend, issuing a communique that had been agreed in draft form before anyone had met. Would anyone notice if the meeting had not taken place? There are not going to be competitive currency devaluations, apparently.