LONDON - After a year that tipped conventional wisdom on its head, the coming week might suggest a return to some sort of normality for the global economy -- or instead take investors into a whole new round of uncertainty.
On the face of it, Wednesday’s expected interest rate hike by the Federal Reserve would be a clear sign that the United States has emerged from the shadow of the global financial crisis, a decade after it began.
As well as raising rates for the third time since the crisis, the Fed is expected to signal it will speed up its so-far tentative approach to weaning the U.S. economy off the extraordinary support of rock-bottom borrowing costs.
Rising inflation, together with a tighter labor, stock market boom and strengthening global economy, has left some economists expecting that the Fed could increase interest rates much faster than is currently anticipated by financial markets.
“The Fed might find itself behind the curve and having to catch up,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
The U.S. central bank lifted its benchmark overnight rate in December and has forecast three rate increases for 2017.
But of course it’s not business as usual in the United States and beyond.
When the world’s most powerful finance chiefs gather on Friday for the first time since Donald Trump became U.S. president, many of them will be alarmed at Washington’s new, protectionist stance, which it wants other countries to endorse.
A draft communique to be argued over by the G20 has dropped the commitment to “resist all forms of protectionism”. A warning against protectionism has appeared in Group of 20 communiques for more than a decade.
A diplomatic smoothing of the differences would be a relief for investors who are worried about what the Trump administration really has in store.
As well as the Fed’s meeting, central banks in four other leading rich economies -- Japan, Britain, Switzerland and Norway are all due to deliver their latest decisions on Thursday.
None of the them are expected to follow the Fed and tighten monetary conditions.
Instead, they are continuing to try to steer their economies back to normality, and in the Bank of England’s case, to offset incipient signs that last June’s vote to leave the EU is starting to weigh on consumer spending.
Yet for all the political upheaval of the last nine months, which began with the British EU referendum, many economies are enjoying their best growth in years.
Against the backdrop of a world economy that is picking itself up and strong momentum at home, the question for the U.S. Federal Reserve is not whether to raise interest rates on Wednesday but how quickly it should do so again.
Economists at AXA Investment Managers said a sharp upgrade of the Fed’s economic growth projections next week could cause investors to price in even more U.S. rate hikes than the three currently expected for 2017.
Fitch’s Coulton said investors should get ready for a different pace of action at the Fed. “We will probably see the second rate hike in three months. It took eight years to get the previous pair of hikes,” he said.
But James Pomeroy, global economist at HSBC, said he expects only two Fed rate hikes this year, beginning next week, as core inflation remains below 2 percent, wages grow slowly and emerging economies feel the strain of a stronger dollar which will weigh on global growth.
“Although at this meeting it’s all very clear that they are going to be raising rates, and the jobs data suggests that the economy is in pretty good health, we think going forward it becomes harder and harder to go it alone and be the only central bank raising rates,” Pomeroy said. – Reuters