By Lars Christensen, Markets & Money Advisory Founder and CEO, LC@mamoadvisory.com, @
Today we have published the March edition of Global Monetary Condition Monitor our flagship publication, which covers monetary policy in 26 countries around the world and gives an overview of global monetary matters and market implications of global monetary trends.
Throughout most of 2017, and particularly in the last quarter of that year and into early 2018, market expectations for US inflation kept inching up. We saw a similar move in our Monetary Indicator, pointing to faster price growth in the medium term. Our forecast now is for the Federal Reserve to slightly overshoot its 2% inflation target.
Given the importance of US monetary policy for global monetary conditions, one should expect that the easing of US monetary conditions would have caused a corresponding easing globally. However, our Monetary Indicators for China and the Eurozone show that conditions have tightened recently. That suggests the European Central Bank will undershoot rather than overshoot its 2% inflation target in the medium term.
In this Monitor we have looked at different monetary policy rules – including a Taylor rule and Nominal GDP target rule. Based on the rules we have simulated different scenarios for the future path for US interest rates.
Our simulations show that the main scenario is for the Fed to hike its key policy rate to close to 2.5% over the next 12 months. This could happen, for example, by two more 25bp increases this year and another 25bp hike in the first quarter of 2019.
Perhaps more interestingly, our simulations indicate somewhat less upside for interest rates in 2019-2020 than the Fed has indicated. Our simulations put the fed funds rate at somewhere between 2.75% and 3.00% within the next 24 months, meaning that we should probably not expect rates to increase by more than 100bp from the present level.
Make sure to visit our Research Shop where you can subscribe to Global Monetary Conditions Monitor.