So while we have seen some softness in inflation expectations through Q417, if we do see signs of genuine price pressures coming through in the quarters ahead, then how aggressively the Federal Reserve (Fed) alter policy will dictate moves in financial markets throughout 2018.
We have to hope that the correct personnel are in place so that the US central bank gets its monetary policy settings just right or the consequences could be severe and far-reaching. Keep in mind that a policy mistake from the Fed is, without doubt, the biggest macro concern held by economists, fund managers and strategists of any at present.
Aside from inflation trends, where the Fed has made it perfectly clear they are most interested in wage growth. However, the other aspect that is concerning the Fed is around the risks to the financial system. The idea that after nine years of low interest rates and a 390% expansion of their balance sheet (through asset purchases), at a time when the US labour market is trending down towards 4% and the US and the global economy is running above trend at 4%, is keeping them awake at night.
So the focus then is on the individuals within the Fed, how they see economic trends developing in 2018 and how willing they would be to alter monetary policy, should the need be there.
Jerome Powell as the Fed Chair
One has to start with Janet Yellen’s replacement and the appointment of Jerome Powell as the new Fed chair, with his tenure starting on 3 February. In some capacity, the market knows less about his views on monetary policy than many actually realise, with the majority of Powell’s communications in recent times focused more on regulatory issues. His views on monetary policy have generally toed a central line and he has never been an outlier. From this point of view, and when married with the idea that he has been an advocate for a December rate hike and three more in 2018, which is akin to Janet Yellen’s, so traders have seen his posting as a smooth and market-friendly transition.