In the U.S., the Fed’s move to roll back its planned rate increases could mean that it will have to speed them up later if inflation picks up faster than the central bank expects, said Peter Hooper, chief economist for Deutsche Bank Securities in New York.
That risks sparking renewed turmoil in financial markets by highlighting the Fed’s policy divergence with the ultra-easy stances of the ECB and Bank of Japan.
Investors got a taste of that in recent days after a series of Fed presidents stressed the need for the central bank to press ahead with interest-rate increases, knocking stock prices off their highs for the year in the process. Yellen can clarify the outlook in a speech scheduled for Tuesday.
“What happened in the first quarter is essentially a microcosm of what we expect to play out in markets over the next six to nine months,” said Ajay Rajadhyaksha, head of macro research in New York for Barclays Plc’s investment-banking unit, referring to the wild price swings in the early months of 2015.
He sees markets caught in a tug-of-war between slow growth and high valuations on one side and central bank stimulus on the other.
Japan isn’t rushing toward more fiscal stimulus. The best way to boost the economy is to quickly implement the existing budget for the next fiscal year, Prime Minister Shinzo Abe said Tuesday, rejecting speculation he would announce a supplementary spending package. Abe reiterated that Japan will go ahead with a plan to increase the sales tax next year, barring a major economic shock.
Political risks also loom large, including the current leadership turmoil in Brazil, the U.K.’s June vote over its membership in the European Union and the U.S. presidential election in November.
Pimco’s Fels summed up the outlook for this year: “We’ll continue to muddle through but the going gets tougher.”