Nobody knows anything
We tend to see movies as pure entertainment, but of course it is a big business too. Film studios across the world pour millions into new projects, hoping to produce a blockbuster or at least earn a decent return.
Many films do not, however. In this regard, one of the most famous quotes in the industry is from the late Oscar-winning screenwriter William Goldman, known for classics such as ‘All the President’s Men’ and ‘The Princess Bride’ as well as ‘Butch Cassidy and the Sundance Kid’.
“Nobody knows anything,” he said, “not one person in the entire motion picture field knows for a certainty what’s going to work.” Predicting whether a movie would crash or soar is hard. Filmmakers must do their best to produce an entertaining product, but ultimately the viewing public will decide whether or not it will be successful. And people can be fickle.
Markets are fickle too, and when it comes to the current economic outlook, Goldman’s statement rings true. Even the US Federal Reserve with its army of top economists is unsure of what to do next. This in turn is weighing on our own Reserve Bank, despite benign domestic inflation data.
Scene one, take one
Let’s start with the Fed, whose policymaking body, the Open Markets Committee (FOMC), met last week. The FOMC left its policy interest rate unchanged, as expected, but did decide to slow the pace at which it shrinks its bond portfolio (quantitative tightening).
The Fed’s problem is that it does not know how tariff increases will impact economic growth and inflation, since no one knows what exactly will be implemented as yet. President Trump has a habit of announcing and then postponing tariff increases, and it is unclear what is a threat meant to extract concessions, and what is likely to stay. All the president’s men cannot seem to agree on the actual policy plan. With the appointment of a Trade Representative, a Cabinet-level official, perhaps trade policy will solidify into something more strategic and less tactical. It seems possible, for instance, that the US will seek to match whatever tariffs other countries impose on its exports, which is fair enough. It will still cause disruptions to supply chains and administrative hassles, but then other countries would basically be able to lower US tariffs by reducing their own.
In the meantime, it is the uncertainty that weighs heavily. Businesses are very adaptable – though adaptation is not costless – but they need to know what to adapt to. The default position for many will be to hold back on making any big decisions. This means economic activity slows down.
The FOMC’s quarterly summary of economic projections, commonly known as the ‘dot plot’ estimate is a useful guide. It displays the anonymous forecasts of officials across the Federal Reserve System. Normally, analysts focus on the median ‘dot’, but this time dispersion between dots is also notably wide. There is little agreement on what lies ahead.
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