Will 2014 see the end of global economic stimulus?
China and the US have made clear signals that the era of global economic stimulus is coming to a close.
China’s finance minister says his country is not planning any new stimulus measures and it is up to the United States to drive the global economy.
Lou Jiwei said that leaders are satisfied with the country’s economic performance so far this year and that in the first five months China had created up to 6 million jobs, 60 per cent of this year’s target.
Analysts say the ruling party appears willing to accept economic growth below its 7.5 per cent target this year so long as the rate of creation of new jobs stays high enough to avoid political tensions.
Lou said China is emphasising structural reforms to spur economic growth and is unlikely to repeat the kind of massive economic stimulus it did in the wake of the 2008 global financial crisis.
“Therefore the global economic recovery depends on the situation in the United States,” he told reporters at a briefing on the sidelines of an annual US-China strategic and economic dialogue in Beijing attended by US Treasury Secretary Jacob Lew.
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For its part, the US Federal Reserve has indicated it plans to end bond purchases in October, winding up a five-year stimulus effort to support the US economy.
The central bank June meeting minutes show that participants of the June 17-18 Federal Open Market Committee (FOMC) meeting saw the economy rebounding from a weak first quarter, largely blamed on bad weather.
“If the economy progresses about as the Committee expects… this final reduction would occur following the October meeting,” the minutes said.
Though the Fed previously has indicated it would end asset purchases by year-end, this was the first time an explicit month has been named. Most Fed-watchers had expected the buying to end in October.
The FOMC has been tapering the quantitative easing program in incremental steps of $US10 billion this year, bringing monthly bond purchases down from $US85 billion in December to $US35 billion in June.
After $US10 billion cuts expected from each of its July and September meetings, the policy makers agreed a final $US15 billion reduction could be decided in October.
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The committee expects it will not begin raising its near-zero benchmark interest rate for “a considerable time” after the asset purchase program ends, “especially if projected inflation continued to run below the Committee’s two per cent longer-run goal”.
Though asset purchases end, the Fed still will continue to reinvest the funds from the bonds it holds. The minutes said that “many” participants agreed that ending re-investments at or after the time of raising rates would be best, with “most” of them preferring to end them “after liftoff”.
The minutes, and the timing of the last bond purchases, re-affirmed the Fed’s expectations that a rate hike would not come before mid-2015.
Policymakers at the meeting considered evidence that inflation had moved up recently from low levels earlier in the year toward the central bank’s 2.0 per cent target.
The Fed’s preferred inflation measure, the personal consumption expenditures price index, has climbed for three straight months, hitting a 1.8 per cent gain in May from a year ago.
Some officials were worried that inflation was heating up, while others expressed concern about the persistence of below-trend inflation in the economy, still struggling to recover five years after the end of the Great Recession.
Policy makers also appeared concerned about the strong run-up in the stock markets, the minutes showed, with a discussion on “whether some recent trends in financial markets might suggest that investors were not appropriately taking account of risks in their investment decisions”.
Citing that reason, they agreed that the Fed should emphasise in its communications that its policy decisions depend on the evolution of the economic outlook.
The potential impacts of developments abroad on US monetary policy were also discussed.
A couple of officials noted moves toward more accommodative policies by the European Central Bank and the Bank of Japan had boosted the economic growth outlook for those areas, potentially helping US inflation return to the Fed target.
“Several others, however, remained concerned that persistent low inflation in Europe and Japan could eventually erode inflation expectations more broadly,” the minutes said.
“And a couple of participants expressed uncertainty about the outlook for economic growth in Japan and China.”
