The U.S. Economy
Following its two-day December meeting, the U.S. Federal Reserve’s policy setting Federal Open Market Committee decided to adjust the federal funds policy interest rate for the first time since December 2008. The rate will increase from a target range of 0% to 0.25% to a target range of 0.25% to 0.50%. In explaining its decision, the committee cited improving labor market conditions and its belief that inflation, over the medium-term, should rise toward the committee’s 2% objective. The committee also said it expects economic conditions to develop in a manner which would justify gradual increases in the federal funds rate, and that for some time the rate should remain below levels that are expected to exist in the longer-run.
Regarding inflation, the latest consumer price index (CPI) data showed that the increase in year-over-year core prices—which exclude food and energy—was 2.02% in November, an 18-month high. Before one gets too worried that the Fed might have gotten behind the curve, however, it is important to note that the Fed’s target is based on the Personal Consumption Expenditures (PCE) deflator, whose core reading was 1.3% in November (differences in methodology explain the disparity between the two measures). We noted last month that core inflation was something to keep an eye on should the impact of U.S. dollar strength and the drop in energy prices (which have pushed overall inflation down) begin to lessen. This remains the case in our opinion even when taking into consideration the more benign PCE figure.
In Washington, Congress looked past the heated rhetoric of the presidential campaign season and agreed on a $1.15 trillion spending bill to fund the government through September 2016. The bill avoided a government shutdown that would have occurred on December 23. In late October, lawmakers agreed on the overall spending figure, and since then had been working on which policy measures would be included in the bill. Republicans were successful in their push to lift the 40-year ban on oil exports, in exchange for which Democrats secured additional tax credits for wind and solar energy. The bill also made permanent a host of tax breaks—notably for businesses and low-income families—that had lapsed or were set to expire.
U.S. real gross domestic product (GDP) grew at a 2% seasonally-adjusted annual rate in the third quarter, a slight decline from the previous estimate of a 2.1% increase. A downward revision to inventories was largely responsible for the small adjustment. The 2% growth figure is a sharp decline from the second quarter’s 3.9% rate of expansion. In addition to the drag from inventory drawdowns, consumer and business spending both declined from the previous quarter. The final reading on year-over-year expansion came in at 2.1% growth, confirming that the third quarter’s figure was the smallest year-over-year advance since the first quarter of 2014.
The Global Economy
China is still increasing its share of the global export market despite negative data regarding its growth and exports and the fact that the renminbi (or yuan) hasn’t depreciated versus the U.S. dollar to the degree that competing currencies have. This year through September, Chinese exports made up 13.5% of global exports, up from 12.5% in 2014. Nevertheless, it is important to remember that changes in price competitiveness typically act with a lag, so we could see erosion in market share in the future.
