Excessive Reliance on the Fed Produced a Dysfunctional US Economic Recovery with Global Implications
The impending commencement of balance sheet reduction by the Fed has increased the importance of data dependency in policy conduct. July’s Employment Situation report reinforced current forward guidance and the higher policy weight attached to labour market conditions vis-à -vis low inflation.
Without consistent help from fiscal policy, the Fed’s efforts to support aggregate demand were invariably going to produce a dysfunctional economic recovery, favouring existing asset owners. Excessive reliance on the Fed to boost workers’ living standards could produce unwelcome political pressure on the US central bank that could spectacularly backfire in financial markets, similar to events in 1987.
Dysfunctional US fiscal policy conduct has helped to produce a protracted soft period of US economic growth, thereby forcing the Fed to tread carefully. The global economy is being held back by US events, despite improvements in the Eurozone.
The global financial system remains awash with liquidity, and there are creeping consequences of this backdrop for countries that maintain fixed exchange rate regimes. Hong Kong’s currency board arrangement has meant that strong capital inflows since 2014 have boosted the monetary base and suppressed interest rates, thereby boosting real estate prices.
US dollar depreciation and Chinese yuan appreciation in 2017 were not anticipated in the aftermath of President Trump’s election victory, but undiluted US fiscal reflation expectations have subsequently been scaled back. China’s efforts to curb capital flight appear to be succeeding as testified by the stabilisation in foreign exchange reserves.
China’s ambitions to internationalise the use of the yuan remain intact after being temporarily shelved in 2016 due to financial market volatility and falling foreign exchange reserves. New initiatives to gradually boost the offshore use of the yuan have been introduced, while Hong Kong will still remain a critical conduit in their implementation.
DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the intention of delivering independent global macro investment insights and new thematic long-term ideas to investors, along with an agnostic opinion of the markets.
Said DeSaque has over 29 years of experience working as a professional economist in financial services, primarily based in London. His working role has involved extensive travel around the world, bringing him into contact with investors of different cultural backgrounds and investment requirements. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist and Investment Strategist at US banks Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he became Head of the London Economics Department in 1996. This role allowed him to engage with senior investment professionals, alongside regulators and provided a unique perspective of market intelligence at work.
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