How This Week Will Affect U.S. Reflation

(Bloomberg View) -- An ensemble comprised mainly of politicians promising more but still playing a rather subdued melody will watch as three important events take center stage this week in the closely monitored U.S. reflation play. How they perform will feed a plot that has important economic, institutional and market dimensions. Here's what to expect for each of them:

The first is today's release of the minutes of the Federal Reserve policy meeting held March 14-15. Look for them to paint a picture of central bankers, as a group, becoming somewhat more confident about U.S. economic prospects, yet holding back in reflecting two factors in their quantitative projections and forward policy guidance: unusually strong readings for corporate and household sentiment, and President Donald Trump's pro-growth policy signals. Consistent with this, the Fed will reinforce its baseline scenario of two additional 25 basis points hikes in 2017 but refrain from explicitly suggesting, at least yet, that the balance of risk favors more rather than fewer hikes.

On Thursday, Trump will host President Xi Jinping of China in Florida, and economic issues will be an important part of the meetings' agenda. Notwithstanding the backdrop of rather aggressive protectionist U.S. rhetoric, especially during Trump's presidential campaign, expect a relatively cordial and constructive tone on economic and financial issues -- one that recognizes economic inter-dependencies and signals a willingness to work together to promote fair trade.

The week closes with Friday's release of the employment data for March. The monthly addition is likely to moderate from the impressively large number (235,000) of new jobs that were reported for February; and for wage growth to edge higher, reinforcing the notion of a Goldilocks labor market.

In sum, the data and policy signals taking center stage this week will reinforce the continued gradual reflation plot rather than shock the audience with the twist of either a dramatic breakout or a major slump. It is the ensemble of European and U.S. politicians that will ultimately determine whether one of these more extreme outcomes materializes.

But an ensemble that has been tempted to stay away from the spotlight when it comes to tough economic policy issues will find it increasingly harder to do so. Greater pressure is building from multiple directions: from the need to avoid a U.S. government shutdown at the end of this month and respond to the president's push for tax reform and infrastructure spending to navigating the first stages of the tricky Brexit negotiations now that Article 50 has been triggered and also reacting to other populist anti-establishment movements in Europe and the tilt toward economic nationalism that inevitably comes with that (including in the context of the French presidential elections).

In recent years, the ensemble has been able to have its less-than-coherent role obfuscated for markets by hyper-activist central banks and the hope of a U.S. pro-growth policy surge initiated by Trump. This week's three key economic developments may well show that this is becoming a less tenable choreograph.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President's Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”

To contact the author of this story: Mohamed A. El-Erian at melerian@bloomberg.net.

To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net.

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