Daily Management Review

Central Banks Seeking Clarity on Outlook Clouded by Brexit Fog


Central Banks Seeking Clarity on Outlook Clouded by Brexit Fog
For most part of the year, the U.S. Federal Reserve and policymakers were able to plot further interest rate increases due to the dollar, oil prices and economic conditions.
However questions like how much does it reflect domestic economic developments and how much the short and long-term implications of an economic reordering that may take years to play out, posed since Britain's June 23 vote to leave the European Union has cropped up related to jobs report and data comes.
The Fed policymakers have to create policies to balance between the risk that major trading partners fall into recession, the dollar surges again, or the terms of Britain's divorce stress the global financial system and the mainly positive flow of U.S. indicators.
In the past it has taken the Fed months to get clarity for the Fed for overseas events of similar importance such as the euro zone debt crisis. Brexit, which has already helping lift the dollar and drive U.S. Treasury yields to historic lows - both trends making it harder for the Fed to move, could present a longer time period.  
"You don't know how long that is going to last and indeed we don't know the magnitude. I doubt there will be a moment where people say, okay, Brexit is done," Federal Reserve Governor Daniel Tarullo said.
Postponing what seemed to be imminent rate increases twice since last summer because of events far from U.S. borders, Britain's decision comes at time when the Fed has grown more sensitive to international events. Ppolicymakers explicitly tied consideration of further rate increases to "additional data on the consequences of the UK vote", as revealed in the minutes of the June meeting released earier this week.
However recent research by the Fed, the Bank for International Settlements, the International Monetary Fund and some private economists has raised the possibility that the Fed may be fundamentally constrained by outside events, like the UK vote despite the fact that no one expects the United States to slip into a recession because of Brexit.
The rapid rise of the dollar since 2014 has curbed U.S. exports and upended the Fed's inflation outlook which indicates that the dollar mat have become more sensitive to global economic conditions. Global capital flows compared to Fed policy also seem to have impacted long-term U.S. bond yields in recent times which remained near record lows have grown more sensitive.
Rate of interest in Europe and other, slower-growing, developed economies may also anchor even the Fed's key estimate of a neutral rate of interest.
Till such time that the European Central Bank had intervened with a forceful pledge to keep the currency union intact, the Fed kept the language for 16 months.
"I would suspect they are really struggling how to decipher short versus long term, and also what is happening in the U.S. domestic economy. I would say the Fed's crystal ball is very, very cloudy," said Beth Ann Bovino, chief U.S. economist for S&P Global Ratings.
San Francisco Fed senior vice president Mary Daly said that the Fed's job will become easier if the U.S. economy keeps growing and creating jobs as expected.
However investors and policymakers will be only able to say for a while what Ken Matheny, senior economist at Macroeconomic Advisers, said when he commented that he expected Brexit to nick U.S. growth.
"I am not sure that in six months we will know. Maybe we will have some understanding of what the settlement will be between the eurozone and the U.K., but even if we know the settlement do we know the economic impact? I am not sure," he said.