Economic and Strategy Viewpoint - July 2019

A gentle touch on the tiller from the Fed? (page 3)

• Slower growth and ongoing trade tensions have caused interest rate expectations to move significantly and bonds have rallied hard.
• There is talk of the US Federal Reserve (Fed) cutting rates as an "insurance" measure to keep the economy on track, an outcome it successfully achieved in 1995 and 1998.
• However, a turn in the capital expenditure cycle, low inflation and concerns about the efficacy of monetary policy are likely to keep the central bank easing into 2020.

What is left in the central bank toolbox? (page 7)

• Conventional monetary policy space is limited in developed markets, and alternative tools come with limitations. Quantitative easing is broadly speaking an option but will likely need to be supplemented with fiscal policy.
• There is some fiscal space available in most advanced economies, though debt sustainability remains a problem for some eurozone economies. Once you factor in political constraints, the eurozone may find the next downturn more challenging than the rest of the developed markets.

EM: Cushioning the blow (page 12)

• Emerging markets (EM) have some advantages over their slower growing, low interest rate cousins in the developed world. Should a global slowdown arrive, they still have an arsenal of familiar weaponry to deploy.
• Monetary space is far greater than in developed markets, and fiscal policy – though constrained – seems more politically viable.

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