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Macroscope | For central banks in 2019, the catchword is caution
- Tai Hui says now more than at any time in the past few years, central bankers will need to scrutinise and respond closely to evolving economic data, and be aware that any miscommunication could adversely affect economic growth
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The world’s major central banks have been running on autopilot for the past few years. Global economic growth has been steady despite rising US-China trade tensions, rising populism in Europe and turmoil in some emerging markets.
The US Federal Reserve has raised its policy rate four times in 2018, by a total of 1 percentage point, to 2.25-2.5 per cent. The European Central Bank is ending its quantitative easing at the end of the year. The Bank of Japan is keeping to its course of asset purchases, given that its inflation target remains elusive. However, these predictable paths are set to change in 2019, potentially making an impact on global financial assets.
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Starting with the US, economic fundamentals still look good. The labour market boasts the lowest unemployment rate in decades and job growth is still robust. This, alongside a healthy household balance sheet, is boosting consumption.
In fact, with the economy running at full capacity, the risk is for inflation to rise in the near term. However, the core personal consumption expenditure deflator – the Fed’s preferred measure of inflation – is still below target.
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Meanwhile, market signals have become gloomier. The S&P 500 has fallen by 10 per cent since early October. The difference between the yields for two-year and 10-year US government bonds, a reliable gauge of market sentiment about the risk of a recession, has fallen to just 0.15 per cent. Investors are worried that this indicator is predicting much tougher times ahead.
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