US fiscal, trade policies make it harder for Fed to time moves: Ex-Treasury secretary

Former US Treasury secretary Jack Lew speaking during a panel in Washington, US, on April 19, 2018.
Former US Treasury secretary Jack Lew speaking during a panel in Washington, US, on April 19, 2018. PHOTO: REUTERS

SINGAPORE - Inflationary pressures stemming from the United States' current fiscal and trade policies have made it harder for monetary policymakers to time their moves, increasing the risk of miscalculation, former US Treasury secretary Jack Lew warned on Thursday (July 12) morning at the OCBC Global Treasury Economic and Business Forum 2018. For investors, this is "not a time to put excessive confidence" on the continued rise of equity markets or overall global growth, but instead to focus on fundamentals, he added.

While the global economy is still "in a sweet spot of low inflation and steady growth", there are many economic and geopolitical risks on the horizon as the business cycle enters its tail end, said Mr Lew, citing North Korea's uncertain commitment to nuclear talks and tensions between the US and its major trading partners.

Added to this uncertainty are pressures from US's current policies, he noted. "Spending your way into the end of a economic cycle is a dangerous business... It makes the correction, when it comes, a harder event to deal with."

He likened US's fiscal stimulus at a time of sustained growth and full employment to "pouring oil on a fire" - bringing short-term growth but with medium and long-term consequences that could prove a drag on growth, such as higher interest rates, inflation and a growing fiscal imbalance. Tit-for-tat trade tariffs have also increased inflationary pressures.

All this makes it harder for the Fed to time its moves to tackle inflation while not cutting off the economic benefits of the current stimulus too early, he said. He advised investors to "rely less on constantly rising markets" and make specific informed decisions about where to invest, with a long-term view.

Former president and chief executive officer of the Federal Reserve Bank of Atlanta Dennis Lockhart, another speaker at the forum, said that he did not expect a recession in the next three years given the current strong outlook for the US economy - nor does the Fed see one in the medium term.

He expects the Fed to be working towards an assumed neutral rate of 2.75 to 3 per cent by late 2019 or early 2020, with four or five more rate increases to get there.

With the Fed having already raised interest rates twice so far this year, a third rate hike can be expected in September and would be justified by the status of the economy, he said. But as for the big question of whether a fourth one would come in December, he remained "agnostic", noting that the Fed will likely "wait for the data to come in... and decide closer to the time". Factors that might cause a slowing or pause in Fed policy action include further flatness or an inversion of the yield curve; financial market instability; and a deterioration of the economic outlook, he added.