The Federal Reserve's views on the strength of the U.S. economy and the need for future interest rate hikes will be on full display this week as two key policymakers deliver speeches over the next two days and minutes of its November meeting are published Thursday in Washington.
Fed Vice Chairman Richard Clarida told an economic conference in New York today that it was "especially important" for he and his rate-setting colleagues to monitor incoming data on the economy to determine the correct policy path, a view which echoed comments he mate in a CNBC interview last week. His boss, Chairman Jerome Powell, is slated to deliver a speech on monetary policy Wednesday as investors grow increasingly concerned that impending rate hikes could damage financial markets and tip the U.S. economy into slowdown or recession.
"As the economy has moved to a neighborhood consistent with the Fed's dual-mandate objectives, risks have become more symmetric and less skewed to the downside than when the current rate cycle began three years ago," Clarida said. "Raising rates too quickly could unnecessarily shorten the economic expansion, while moving to slowing could result in rising inflation and inflation expectations down the road that could be costly to reverse."
In fact, a Fed policy error is consistently cited in investor surveys as the market's biggest outside of the ongoing U.S.-China trade war, but with falling oil prices, slowing growth in Europe and the threat of new tariffs on China-made goods by President Donald Trump, Fed officials might have found a window during which they can pause their rate path projection until investors -- and company bosses -- can get more clarity on the fate of the global economy.
The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.17% higher Tuesday at 97.24, but has fallen around 0.5% over the past two weeks as global equity markets slump amid increasing signals of slowing economic growth. Investors have also been trimming bets on 2019 rate hikes, according to data from the CME Group's FedWatch tool, which shows a 37.8% chance of a March increase, down from 43% in late October, and only a 14.7% chance that it would followed by a subsequent hike in June.
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"The economy this year is going to be growing at a pace we haven't seen in a decade," Clarida told CNBC television last week. "Going forward, we have to look at a lot of trends, including the global economy, and there's some evidence that it's slowing."
"We're at a point where we need to be especially data dependent," he added "The economy is doing well and we're looking at signals from the labor market and inflation to get a sense of both the pace and destination of policy."
The Fed's twin mandate, however, means it must adjust its rate stance based on domestic inflation and the strength of the labor market, and both appear to warrant further action. Headline consumer prices accelerated by an annual 2.5% last month, Commerce Department data indicated, 0.2 percentage points faster than the September rate and firmly ahead of the Fed's 2% target. Unemployment, as well, is hovering near the lowest levels since 1969 as average hourly wages rise at the strongest pace in nearly a decade.
Consumers appear happy to spend that extra cash, as well, with data from Adobe Analytics suggesting U.S. retailers tallied nearly $8 billion in Cyber Monday sales this year, the largest on record, as shoppers splurged nearly $20 billion over the so-called "Turkey 5" holiday shopping period that began on Thanksgiving.
However, other signals suggest the positive sentiment isn't shared by consumers and investors overseas. Private data from IHS Markit suggests Eurozone economic activity eased to its slowest pace in four years this month, while GDP in Germany and Japan, two of world's biggest exporters, surprisingly contracted last quarter. Global oil prices, too, have fallen some 25% from their early autumn peak amid concerns that supply will notably outpace demand into the first half of next year.
Slowing global growth undoubtedly has the ability to spill over into the United States as the impact of the ongoing trade war between Washington and Beijing intensifies. European Central Bank President Mario Draghi told lawmakers in Brussels yesterday that, while he saw the current trade drag on growth to be temporary, "risks relating to protectionism, vulnerabilities in emerging markets and financial market volatility remain prominent."
"A gradual slowdown is normal as expansions mature and growth converges towards its long-run potential," Draghi told lawmakers on the European Parliament's committee on economic affairs. "Some of the slowdown may also be temporary ... in fact, the latest data already show some normalising of production in the car industry which has been impeded by one-off factors."
This could be why the Fed will keep its cards close to its chest this week, as the fate of U.S.-China trade talks comes down to the wire this weekend in Argentina, where President Trump and Xi Jingping will meet on the sidelines of the G20 summit.
A breakthrough in talks could remove some of the temporary impacts on trade, allowing U.S. growth -- and inflation -- to accelerate into the new year. Equally, however, failed attempts to bridge differences between Washington and Beijing could trigger fresh tariffs on $267 billion worth of China-made goods, as well as higher levies on an existing basket of $200 million, and subsequently lift consumer price inflation while inhibiting broader economic growth.