29th April 2016
Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock discusses yesterday’s Fed statement below.
The Federal Reserve may well restrict itself to one rate rise this year if the US labour market deteriorates further. The Fed is also concerned with risks abroad says BlackRock.
“Just as we described at last month’s policy meeting, the announcement yesterday by the Federal Reserve’s Federal Open Market Committee (FOMC) represents a continuation of its “wait-and-see” approach, which seems well calibrated to us given the myriad crosscurrents in the global economy today. Indeed, while the Fed continues to try to keep the door open to interest rate policy normalization, the pace of that change has been profoundly altered since the December 2015 meeting. That’s due both to some softness in domestic economic data and to the striking volatility that roiled markets in the year’s first quarter, itself largely the result of a deteriorating international economic landscape. Thus, as we argued previously, accurately judging the policy path for the Fed will require keeping one eye on domestic economic fault lines (corporate profits, jobs growth, etc.) and the other on conditions abroad, and particularly in China.
“As a result, beyond watching the U.S. labor markets and rate of inflation, the FOMC will keep its eyes trained on movements in the U.S. dollar, as a gauge of potential stress in the global financial system. Given the importance of China to the global growth dynamic, and the country’s previous effective peg to the USD (now a more diversified basket structure), it’s not at all surprising that USD strengthening in 2014 and 2015 placed great pressure on China’s growth rate. Indeed, dollar strength, and what we have described in the past as a “shortage of dollar exports,” has been a key fault line stressing financial markets in late-2015 and early-2016. Some modest weakening/stabilization in the USD of late, as well as continued aggressive policy response from foreign central banks has eased global financial conditions in recent months and alleviated stress points.
“Indeed, it’s not too surprising that the mid-February statement by PBoC Governor Zhou, when he stated that: “For a country as big as China to achieve the reform goals may require a considerable period of time…. We can wait a bit and create more favorable conditions for reform,” coincided with the calming of market stress. Thus, China has decided to delay reform and embrace a strengthening of growth by pushing on both monetary and fiscal policies. That is a short-term positive for global growth and financial conditions, but could be a medium-term negative to the degree that delayed reforms and leverage build-up could present greater risks to stability in the future. For now, though, we can see the recovery of commodity prices (one of the best short-term reflections of supply/demand conditions) as indicative of a stabilization in China and much of the emerging world.”