12 Dec 2014
Impact of foreign shocks, and the response of the US monetary policy – Nomura
FXStreet (Barcelona) - The Research Team at Nomura notes that foreign influences in the form of asset purchases by central banks is working towards accelerating interest rate adjustment and boosting US growth in the near-term.
Key Quotes
“The recent decline in oil prices is substantial and should boost growth in the near term. It will also have a large, but temporary, effect on headline inflation. The impact of oil prices on growth should have the more lasting impact on the trajectory of US monetary policy.”
“An imbalance between saving and investment is limiting growth prospects abroad. That imbalance is also putting downward pressure on US interest rates, primarily through term premia. Significant asset purchases by the Bank of Japan, and the prospect of such by the ECB, are probably adding to these pressures. Relative to the other factors considered here, these effects are important.”
“It is noteworthy that US long-term rates are notably lower than they were at midyear, in spite of the fact that the outlook for the US economy is certainly no worse than it was then and we are six months closer to the start of interest rate adjustment. The work presented here suggests that these foreign influences on US rates boost growth in the near-term and are working to accelerate interest rate adjustment.”
“Over the next year or so, these factors have roughly offsetting effects on the real economy, and the impact of lower oil prices on inflation is temporary. That means that foreign factors should not have a big effect on the trajectory of monetary policy over the next year or so.”
“Over a longer horizon, however, the effects of a sustained appreciation of the dollar should be a drag on growth. This is likely to slow the pace of adjustment of short-term interest rates over the medium term. The net effect of these factors – primarily the current pressure on term premia and the impact on the path of short-term rates over the medium term – is to lower long-term interest rates now.”
Key Quotes
“The recent decline in oil prices is substantial and should boost growth in the near term. It will also have a large, but temporary, effect on headline inflation. The impact of oil prices on growth should have the more lasting impact on the trajectory of US monetary policy.”
“An imbalance between saving and investment is limiting growth prospects abroad. That imbalance is also putting downward pressure on US interest rates, primarily through term premia. Significant asset purchases by the Bank of Japan, and the prospect of such by the ECB, are probably adding to these pressures. Relative to the other factors considered here, these effects are important.”
“It is noteworthy that US long-term rates are notably lower than they were at midyear, in spite of the fact that the outlook for the US economy is certainly no worse than it was then and we are six months closer to the start of interest rate adjustment. The work presented here suggests that these foreign influences on US rates boost growth in the near-term and are working to accelerate interest rate adjustment.”
“Over the next year or so, these factors have roughly offsetting effects on the real economy, and the impact of lower oil prices on inflation is temporary. That means that foreign factors should not have a big effect on the trajectory of monetary policy over the next year or so.”
“Over a longer horizon, however, the effects of a sustained appreciation of the dollar should be a drag on growth. This is likely to slow the pace of adjustment of short-term interest rates over the medium term. The net effect of these factors – primarily the current pressure on term premia and the impact on the path of short-term rates over the medium term – is to lower long-term interest rates now.”