International fiscal policy is slowly entering a new phase – but you should look carefully for the signs or you might miss them.
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The messages from central banks are carefully worded and often couched in smoke-and-mirror terms so no one can blame them if the economy goes wrong.
But after a decade of relative inactivity, the people in power in the US Federal Reserve and the Bank of England are coming out of hibernation and slowly readying to pull the levers that signal higher interest rates.
Fed chair Janet Yellen has already put the brakes on quantitative easing (QE) in the States – basically the Fed is halting the program that prints money for the banks to stabilise the US economy.
Improving economy in the US
Most commentators interpret this major step as the precursor to at least one interest rate rise by the end of the year.
“The labour market has continued to strengthen and that economic activity has been rising moderately so far this year,” said the rate-setting Federal Open Markets Committee she chairs.
“Job gains have remained solid in recent months, and the unemployment rate has stayed low. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters.”
What she means is the economy is improving and the Fed can step back after a decade of giving first aid.
In London, Bank of England governor Mark Carney is heading on a similar tack to his US counterpart.
Brexit effect
He has explained he expects Brexit to push up inflation but “some withdrawal of monetary stimulus” may be called for to push inflation back on course for a 2% annual rise. Inflation hit 2.9% last month – just below the 3% trigger for Carney to write to the Chancellor Phillip Hammond to explain why the rate was so high.
Carney agrees with Yellen that the time is right for the Bank to stop QE and that UK interest rates may have to go up as well.
But the unknown variable in the UK is Brexit and where the economy will be in March 2019, when Britain uncouples from the EU.
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