Global Economies Grow in Sync 

For the first time in a decade, the world’s major economies are growing in sync, a result of lingering low-interest-rate stimulus from central banks and the gradual fading of crises that over years ricocheted from the U.S. to Greece, Brazil and beyond.

All 45 countries tracked by The Organization for Economic Co-operation and Development (OECD) are on track to grow this year, and 33 of them are poised to accelerate from a year ago, according to the OECD. It is the first time since 2007 that all are growing and the most countries in acceleration since 2010, when many nations enjoyed a fleeting snapback from the global financial crisis. The International Monetary Fund in July projected global economic output would grow 3.5% this year and 3.6% in 2018, up from 3.2% growth in 2016.

Federal Reserve Chairwoman Janet Yellen and European Central Bank (ECB) President Mario Draghi, both speaking in Jackson Hole Friday, can point to the global backdrop to justify plans to pull back stimulus programs. The Fed is expected in September to begin reducing  the $4.5 trillion in holdings that was built up over the decade. The ECB is nearing the end of its own bond-purchase program.

The Fed has made clear its ambition to start running off its balance sheet, potentially as soon as this year. There is speculation that Mario Draghi, president of the European Central Bank, might shed some light on his likely approach to a tapering of QE at an annual gathering of central bankers in Jackson Hole, Wyoming, this week.

The Phillips Curve Conundrum

One of the main tools the Fed uses to set interest rates is the Phillips Curve.  The Phillips Curve is a single-equation empirical model, named after William Phillips, describing a historical inverse relationship between rates of unemployment and corresponding rates of inflation that result within an economy.   The Phillips Curve assumes that high levels of employment will pressure wages, increase incomes, increase spending and drive inflation higher.  Therefore as the U.S. unemployment rate continues to decline, inflation expectations should be rising.  The dual mandate of the Fed is to achieve both stable prices and maximum sustainable employment.  However, in the recent months with central banks using artificial ways to pump money into the economy, this inverse relationship is seen to be dying. A number of analysts have warned that this could be risky for the global economy and discussions around the death of the Phillips curve could dominate the Jackson Hole symposium. Recent economic data shows a downward movement in unemployment rates but inflation lagging gains.

The ECB too recently cut its inflation outlook in June. Mario Draghi, said that the central bank now anticipates inflation levels of 1.5 percent in 2017, 1.3 percent in 2018 and 1.6 percent in 2019. Meanwhile, minutes from July’s ECB meeting showed a lengthy discussion of the disconnect between inflation and employment. The ECB attributed this to a number of factors that were likely to be of a more structural nature.