From US to Japan: A rundown on world economy's most important week in 2018

Billed as the most important week of the year for the global economy, central banks provided insight into the outlook for monetary policy through the rest of 2018 and beyond and putting a clear stamp on financial markets.

The Federal Reserve raised interest rates, the European Central Bank said it would stop bond buying in December and the Bank of Japan kept stimulating. It was the People’s Bank of China, however, which perhaps transmitted the most tremors through markets as it chose not to follow the Fed in hiking.

The policy makers acted as economic data disappointed in many regions outside of the US and International Monetary Fund Managing Director Christine Lagarde spotted “clouds on the horizon” as the US and China moved to the brink of a trade war on Friday.

Investors reacted to all the events by sending the dollar to its largest weekly gain since 2016 while keeping pressure on emerging markets vulnerable to the more restrictive policies.

Here’s our rundown of the top things we learned from monetary policy makers this week:

The Federal Reserve
 

The Fed delivered on a widely anticipated 25-basis-point interest-rate hike Wednesday. It also took the opportunity to turn more hawkish with policy makers now forecasting four increases this year rather than the three anticipated in March. Chairman Jerome Powell sold the tightening as reflecting a “great” economy and said he will be talking more next year when he will hold press conferences after every policy meeting instead of every other. Data continued to bolster the Fed’s case with consumer prices climbing in May at the fastest pace in more than six years and retail sales topping expectations. As for where the Fed is headed, Powell said there’s still disagreement about how low unemployment can go.

European Central Bank
 

President Mario Draghi pulled off the rare feat of proving both hawkish and dovish. He announced that the ECB would end its crisis-fighting quantitative easing program in December, yet also said it expects interest rates to remain unchanged at least through the summer of 2019. That refocuses investors on rates as the central bank’s key tools, but he may leave the helm of the ECB before they are ever raised. A series of data released on the eve of the meeting hadn’t helped matters as they showed signs of slowing and Draghi conceded the soft path may endure.

Japan, China
 

Falling further behind its main counterparts, the Bank of Japan left its quantitative easing program in place and downgraded its assessment of inflation. The BOJ maintained the settings on its yield-curve control program and asset purchases, but now sees the core consumer price index in a range of 0.5 percent to 1 percent, from around 1 percent previously. BOJ Governor Haruhiko Kuroda said Friday that a stronger yen and cheaper accommodation prices had weighed on inflation, but momentum toward the 2 percent price target remained intact.

Perhaps the biggest surprise among major central banks was China’s decision not to raise borrowing costs after the Fed. It stood pat after data for industrial production, retail sales and investment all showed the world’s second largest economy is losing steam. Adding to the concern, Trump pledged to confront China “very strongly” over commerce as he readied duties.

The Rest of the World

Argentina may have dealt the biggest shock to markets as its government named a new central bank chief as the peso kept falling despite the IMF ladling out the biggest loan in its history. The Reserve Bank of Australia will remain on hold for a good while amid a global puzzle on sluggish wage growth, according to chief Philip Lowe. In Hungary, Deputy Governor Marton Nagy said the central bank is prepared to tighten if the forint’s decline endangers its inflation target. Czech policy makers are readying themselves to resume raising borrowing costs earlier than planned. Norway might have to curb tightening plans if inflation continues to disappoint, but Sweden may need to act. Elsewhere, faster inflation in India has investors on watch for a rate hike and Pakistan devalued its currency for the third time since December. Chile signaled a rate increase by the end of the year, while Russia, Iceland, Uganda and Namibia left rates on hold.