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Politics is a long game, the financial markets an extremely short one. The economy could be said to be somewhere in between. It is necessary to reconcile the durations of those three games to compose an economic and financial scenario that does not bring too much dissonance. In such a scenario the cycle will prosper, and even strengthen, provided that political risks do not materialise due to a draconian tightening of financial conditions.
This publication presents the economists' forecasts for interest rates, exchange rates and commodity prices, along with the Crédit Agricole Group's central economic projection.
As widely expected, the FOMC raised the Fed funds (FF) target by 25 bps to a range of 0.75% to 1.00%. The Fed's median projection for the FF rate at the end of 2017 was 1.4%, implying two additional 25 bps rate hikes this year. This is unchanged from the December projection as was the projection for yearend 2018 at 2.1%, implying 3 additional hikes next year. The longer-run fed funds rate projection remained at 3.0%.
The Republican's key legislative focus this year is on repealing the ACA and passing a tax reform package. That is a very ambitious agenda that is unlikely to be implemented before next year, in our view. ACA Repeal/Replace: Easier said than done. The current proposals have yet to convince a majority in Congress given concerns for millions who may lose their health insurance coverage in the years ahead and tax hikes for those with generous health care plans. The House leadership plans to move forward with its proposals nonetheless.
US economic performance is likely to warrant further gradual increases in the federal funds rate. Chair Yellen reiterated her view that "waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession."
As widely expected, the FOMC left its monetary policy unchanged with the Fed funds rate target range maintained at 0.5% to 0.75% at its February meeting. The Fed's balance sheet reinvestment policies were also unchanged.
The issue of populist movements does not stop at elections. In the longer term, it poses the problem of the legitimacy of elites and solutions for reconciling democracy and globalisation. In fact, we have now entered into a political cycle, ie, a point in history where politics has taken over from the economy and is imposing its own rationality. There is no going back: we are seing a transition of both internal and external political equilibrium.
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