One thing is for certain, Brexit will not pull the U.S. economy into a recession.
Oil prices, the trend of the greenback and other economic conditions to a great extent behaved to the expectations of the U.S. Federal Reserve, which allowed it to plot further hikes in interest rates this year.
The outcome of Britain’s referendum however has spoilt the scene. Brexit has jolted almost every segment of the economy with the result that a lot of the data now comes with a question mark – the impact of Brexit on domestic economic development, including its short and long term implications including economic reordering levels will have to be reworked out.
For the Federal Reserve this means, it will have to rebalance the flow of mostly positive U.S. indicators against risks of its major trading partners falling into a recessionary slope, the terms that Britain is likely to get for its divorce as well as the resultant surge of the dollars against the basket of global currencies in the wake of Brexit.
Earlier, when the Eurozone debt crisis took place, it took at least several months before the feds got any clarify on the economic outcome that is likely to take place. Brexit could be even more difficult to decipher. Already, the vote has strengthened the USD and driven U.S. Treasury yields to their historic lows. Both of these trends will make the job harder for the feds.
“You don’t know how long that is going to last and indeed we don’t know the magnitude,” said Daniel Tarullo, the Federal Reserve’s Governor. “I doubt there will be a moment where people say, okay, Brexit is done.”
The referendum has come at a time when the Fed has grown more sensitive to international events: it has twice postponed its decision to lift interest rates since last summer.
As per the minutes of their June meeting, which was released this Wednesday, the Fed has explicitly tied the rate hike to “additional data on the consequences of the UK vote”.
However one thing is sure, Brexit will not cause a recession in the US. Having said that, private economists and the IMF are however concerned with Brexit since it essentially limits the scope of play for the Feds since they are constrained by several events outside their control.
In essence the global economic has just become more tightly knit. The USD has become more sensitive to global economic conditions and its surge since 2014 has led to diminished US exports and has acted as a support for inflation in the U.S.
Even long term U.S. bond yields have remained near their record lows and have grown more sensitive to global capital flows. Even the Federal Reserve’s key estimate of a neutral rate of interest is likely to be anchored by such rates in Europe and other developed economies.
“I would suspect they are really struggling how to decipher short versus long term, and also what is happening in the U.S. domestic economy,” said Beth Ann Bovino, chief U.S. economist for S&P Global Ratings. “I would say the Fed’s crystal ball is very, very cloudy.”
He went on to add, “I am not sure that in six months we will know. Maybe we will have some understanding of what the settlement will be between the eurozone and the U.K., but even if we know the settlement do we know the economic impact? I am not sure.”
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