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Questions for 2014

Thoughts from Northern Trust's Chief Economist on Current Topics and Their Impact on the Economy

It’s often said that economists are pretty good at coming up with questions, but not as adept at coming up with answers. It’s a fair charge, to which I’d occasionally have to plead guilty.

In that spirit, here are some questions (along with my attempt at responses) about key economic themes for the months ahead:

How will the Fed operate under new management?
Janet Yellen’s ascension to the helm at the Federal Reserve will be closely watched. The process of tapering the central bank’s asset purchases began late last year, and is projected to continue steadily in coming quarters. While Yellen’s views may influence the pace of exit, the progression of the U.S. economy will be the biggest consideration.

Will politics muddy the economic waters?
2014 includes key elections in many parts of the world, not the least of which is the mid-term balloting in the United States. This may create some policy uncertainty, especially as we approach the Treasury’s debt ceiling in early spring.

Will Japan continue its recovery?
Prime Minister Shinzo Abe has succeeded in ending deflation and promoting stronger Japanese growth. Ahead lies some structural reform of the Japanese economy, though, which may prove challenging.

Will America continue to enjoy an energy boom?
U.S. production of crude oil and natural gas has been surprisingly strong, thanks to advanced technology for identifying and harvesting reserves. This has produced a cost advantage for manufacturers and helped hold inflation down. But other countries are looking to take advantage of their own resources, which may level the playing field.

Can Europe end its malaise?
Great Britain seems to have nice economic momentum, but the eurozone continues to struggle. Freeing the flow of credit by shoring up weak banks will be a central effort for Europe this year.

Has China peaked?
Chinese economic performance over the past generation has been remarkable, and growth there will continue to exceed that of the United States. But problems like pollution, shadow banking, a housing bubble, and competition from Asian neighbors may slow China’s pace.

How high will interest rates go?
Short-term rates will likely remain anchored close to zero during 2014, thanks to the Fed. Long-term interest rates rose quite a bit last year, on concerns that quantitative easing would be closed down quickly. Given indications that tapering will be a prolonged process, and in light of very modest U.S. inflation, we are not calling for much of a rise in yields this year.

I’m sure there will be other questions that arise during the course of 2014, and we look forward to asking and answering them for you.

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