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Fed policy – more complex than the dot plot suggests

| Posted by: Paul Donovan | Tags: Paul Donovan

  • Rosengren of the US Federal Reserve has been talking about the desirability of reducing the Fed's balance sheet in certain circumstances. This is a reminder of two challenges faced by investors trying to understand central bank policy.
  • Central bank policy is not just monetary (interest rate) policy. There is also quantitative (balance sheet) policy and regulatory (effectively savings tax) policy. This complexity renders the Fed's dot plot projections ever more meaningless. Central banks no longer divide on a simple Taylor Rule spectrum – policy is more complex, so divisions are more complex.
  • The UK BRC like-for-like retail sales data showed a laconic increase in spending by the UK consumer. The full consequences of sterling's weakness have not been passed to the UK consumer (so far), and past wage increases are supporting the consumer. The question is what happens next.
  • Chinese consumer prices rose a little less than expected, and producer prices rose more. Chinese consumer price inflation has no impact outside China. Producer prices reflect in part reduced supply in heavier industry, which may reverse later this year. The international implications of this are also very limited.