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Mar 21, 2019

Real Time Economics: With the Fed On Hold, Is It Time to Worry About the Economy?

The Wall Street Journal.
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Real Time Economics
Good morning. Jeff Sparshott here to take you through key developments in the global economy. Send us your questions, comments and suggestions by replying to this email.

You're Not Going Anywhere

The new message from the Federal Reserve: We're not likely to raise interest rates this year and may be nearly finished with rate increases altogether. “It may be some time before the outlook for jobs and inflation calls clearly for a change in policy,” Fed Chairman Jerome Powell said after the central bank’s two-day meeting. As recently as December, the Fed had planned to keep raising rates to keep the economy from overheating. Now, a majority of officials see just one more increase in the next three years, Nick Timiraos reports.

Running Low on Ammo

The Federal Reserve now believes its monetary policy is back to normal. That should worry you, Greg Ip writes.
  • The Fed can be satisfied with what it has achieved. The economy is expected to grow solidly, unemployment is low and inflation this year should hit central bank's 2% target.
  • But this new “normal” stance of monetary policy is extremely stimulative. The federal-funds rate is just 0.25% when adjusted for long-term expected inflation. By comparison, the real rate was 2.75% at the end of the Fed’s last tightening cycle in 2006, and 4% at the end of the prior cycle in 2000.
  • Such expansive monetary policy suggests powerful underlying forces such as slow-growing populations and diminished investment opportunities are weighing on growth and inflation. And should the economy stumble again, the Fed won’t have much ammunition with which to respond.

What to Watch Today

The Bank of England releases a policy statement at 8:00 a.m. ET.
U.S. jobless claims are expected to fall to 225,000 from 229,000 the prior week. (8:30 a.m. ET)
The Philadelphia Fed's manufacturing survey for March is expected to rise to 5.0 from -4.1 a month earlier. (8:30 a.m. ET)
The Conference Board's leading economic index for February is expected to rise 0.1%. (10 a.m. ET)
President Trump joins CEOs from America's biggest companies at the Business Roundtable's quarterly meeting. (11 a.m. ET)
Japan's consumer-price index for February is out at 7:30 p.m. ET.

Top Stories

You Must Believe In Spring

Did the Fed overreact? Fed policy makers decided to leave rates on hold Wednesday, which was no surprise. The degree of their dovishness was. Sure, the economy has looked weak after being buffeted by the government shutdown, unusually inclement weather and the souring of sentiment that came with the stock market’s selloff last year. But the weakness seems temporary. Economists polled by Macroeconomic Advisers expect gross domestic product will grow at just a 1.1% annual rate in the first quarter, but that it will bounce up to 2.7% in the second, Justin Lahart writes.

Stop, Go ... Yield

The 10-year Treasury yield tumbled to its lowest level in more than a year after the Fed signaled it was unlikely to raise interest rates this year. Treasury yields typically rise when investors are confident about the economic outlook and retreat when growth prospects look more murky, Akane Otani reports. The 10-year is used as a reference for everything from auto loans to mortgages.

Road Conditions

BMW said global economic and trade pressures as well as high investment costs would contribute to a significant decrease in profit this year. The German automaker had seemed to be navigating headwinds from the U.S.-China trade dispute, foreign-exchange rates and raw material prices. But Nicolas Peter, BMW’s finance chief, said these issues have hit the company hard. Another wild card is the Brexit outcome for the U.K., where BMW has operations, William Boston reports.
“We are already seeing a slowdown in the global economy,” Mr. Peter said. “If conditions deteriorate further, effects on our guidance cannot be ruled out.”

Trump: China Tariffs Staying Put

President Trump said the U.S. expected to keep tariffs on Chinese goods in place for a “substantial period of time,” even after a deal. “We have to make sure that if we do the deal with China that China lives by the deal,“ the president told reporters. The details of a tariff rollback are the subject of ongoing negotiations, as are questions about enforcement, technology transfer, cross-border data flows and other issues. High-level talks resume next week and the two sides hope to wrap up a deal by the end of April, Bob Davis and Rebecca Ballhaus report.

The iPhone, Amazon and Uber Effect

New data suggest the latest technology boom is starting to give the economy a small jolt. Multifactor productivity grew 1% last year, the strongest gain since 2010. The figure is a rough measure of innovation—how much more companies are able to produce by coming up with better ways to use existing resources, rather than by adding more workers or machines, Josh Mitchell reports. 
Labor productivity—a more closely watched measure of how much U.S. workers produce per hour—is the biggest factor in the economy’s ability to raise Americans’ living standards. When companies can produce more with less, profits grow and workers, over the long run, benefit from lower prices, higher wages and more job opportunities.

Ministry of Silly Walks

The U.K. asked the European Union to delay its departure from the bloc until June 30. But EU leaders are likely to grant such a short extension only if British Prime Minister Theresa May can win backing next week from the U.K. Parliament for her Brexit deal, Max Colchester and Laurence Norman report. Mrs. May’s request keeps alive the possibility that Britain could still spill out of the EU without a withdrawal deal at the end of next week.
U.K. consumers don't seem bothered by Brexit. British retail sales rose 0.4% on the month in February after increasing 0.9% in January, relatively strong gains that should help fuel growth in the first quarter, Jason Douglas reports.

Quote of the Day

It’s a great time for us to be patient and watch and wait and see how things evolve.
Fed Chairman Jerome Powell, speaking to reporters

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