LONDON (Reuters) – Greece’s struggles with its eurozone creditors may have grabbed much of the world’s attention, but US Federal Reserve Chair Janet Yellen is likely to reclaim the spotlight this week with testimony on a long-anticipated shift in policy.
If the Fed sticks to mid-year for its first interest rate rise in a decade, it will be perceived as a reflection of the world economy’s growing resilience.
US core CPI inflation data due next week will also give some idea of just how much the collapse in oil prices which has tamped down inflation globally will work as a counterweight to the Fed’s apparent comfort so far with higher rates in June.
But the fretting over Greece – which makes up less than half of one per cent of world GDP – has underscored the impression that for all of the piles of monetary stimulus over the past few years, much of the troubles remain the same.
While purchasing managers’ data for the eurozone in February are pointing in the right direction, Europe is still struggling to create meaningful growth that would generate the kind of strong hiring that might in turn push up wage inflation.
China is grappling with a property market and debt overhang as it tries to rebalance its slowing economy and a purchasing managers’ index due on Wednesday is expected to show persistent stagnation in its once-booming manufacturing industry.
Much of Latin America, particularly Brazil, has slipped back even further from a past position of strength and has very little to offer a world economy that the World Bank warns is now running on one engine, made in America.
Minutes to the Fed’s latest policy-setting meeting suggested to some analysts that policymakers might be backing off a June rate rise. But the strongest set of jobs data in many years were published after that late January Fed meeting took place.
“If unemployment keeps falling, the laws of supply and demand have not been repealed, we will get inflation out of this,” said Jim O’Sullivan, chief US economist at High Frequency Economics in Valhalla, New York.
“In terms of going to the next step, does that mean they’re tightening in June? Not necessarily,” he said.
O’Sullivan expects Yellen to sound optimistic on the full employment part of the Fed’s dual mandate when she delivers her twice-annual testimony to Congress on monetary policy, starting with the Senate Banking Committee on Tuesday.
The majority of forecasters still expect June for lift-off on US rates, and the latest Reuters poll suggested that about two-thirds of them had held to the same conviction over the timing over the course of the past month.
What hasn’t been working in the Fed’s favour is evidence that inflation is picking up. Core inflation, which strips out food and energy prices, is expected to hold steady at 1.6 per cent when data are due Thursday, according to a Reuters poll.
With a few notable exceptions, like Brazil, inflation has been far too low for comfort, and continues to fall, triggering surprise central bank monetary easings from Canada to Sweden to Australia to Indonesia over the past several weeks.
To many, that makes the Fed’s continued focus on soon doing the opposite seem out of step. But perhaps not for long.