Central banks stuck between rising inflation and recession risk

This will certainly be the central theme of the annual summit of central bankers in Jackson Hole, Wyoming, which has been held by the Kansas City Federal Reserve for more than four decades and will take place once more face-to-face after two years from afar. face to face this Thursday through Saturday. The highlight is the intervention of national Federal Reserve chief Jerome Powell on Friday. Triggered by the expectation of a slowdown in reference interest rate increases after the stock market’s rise at the beginning of summer, investors have been on the sidelines for a few weeks before the messages that the person in charge of the world’s largest central bank could send.

review expectations

Thus, the Federal Reserve (FED) increased the price of the currency by 2.25 points to the range of 2.25%-2.5% this year. After a 0.75-point rate hike in July, the market interpreted Powell as leaving the door open for a 0.5-point increase in September, followed by 0.25-point increases. But investors were skeptical and some see a possible 0.75 rise again, a possibility fueled by the Atlanta and Kansas City Federal Reserves, Raphael Bostic and Esther George this Thursday.

“Facing such high inflation, which is hard to predict in the short term, the Fed’s absolute priority in the fight against rising prices and willingness to continue tightening monetary policy. Allianz Global Investors’ Franck Dixmier said that the markets, which predict that interest rate hikes will peak at the end of 2022, will have to revise their expectations upwards and this may cause volatility.

different situations

Here is the situation in the United States different from europeAs evidenced by the euro falling below par with the dollar. Its economy has accumulated two-quarter declines (0.4% in the first quarter and 0.2% in the second quarter). However, your government and the Federal Reserve believe it not in recession yet. And analysts, if they come in, it will be softThis gives the central bank room to tighten its policy even more.

“It’s hard to say that the United States is in a recession with an unemployment rate of 3.5% and about 11 million unfilled jobs,” said Vontobel’s David Norris. Inflation fell more-than-expected to 8.5% from 9.1% in July and there are signs that it may have peaked already, but remains historically high.

So the most common view among experts today is that the Federal Reserve will raise interest rates to 3.5-3.75% by the end of this year or early next year. But we’ll see if they change their minds after Powell’s message on Friday. The Kansas City Federal Reserve Chair has left the door open to get them above 4%, for now.

harsh winter

The situation in Europe is quite different. this European Central Bank (ECB) No rate hike until the end of July (0.5 points, until the reference rate reaches 0.5% and stop charging banks to hold their money). Inflation in the euro area also continues unabated. It reached an all-time high of 8.9% in July, up from 8.6% in June. most unemployment at historical bottoms (6.6% in June) and most GDP continues to grow (0.6% in the second quarter), there are indicators pointing to a recession.

Hanging above the continent is the threat of a possible interruption in the supply of Russian gas, on which Germany is highly dependent (the engine and the euro’s largest economy). “The eurozone faces the second half of the year. Energy prices are incredibly unpredictable at the moment so it’s hard to pinpoint the peak of inflation. A peak of over 9% annual inflation makes sense at this point, but Jumping over 10% is absolutely unimaginable “Given the high gas prices in the market”, ING pointed out the analysis department. In fact, in Spain it is already 10.8%.

room to harden

Everything shows that, therefore, ECB won’t soften pace of rate hikes for now. Isabel Schnabel, one of the most influential members of the central bank’s executive board, said: “We decided to increase by 50 basis points in July, taking into account the inflation outlook. I don’t think this outlook has changed radically at the moment.” She said she last week. The Euro will also have a corresponding intervention at Jackson Hole this Saturday. The central banker did not rule out the recession, but sure there is “no indication” that it might be “long and deep”. In other words, he sees room to tighten monetary policy.

The market is currently expecting the institution to raise rates to around 1.5-2% early next year. A level that may not seem very high compared to the IPC, but it should be taken into account that the rate hikes serve Turkey. cooling inflation by making finance more expensive and therefore reducing demandhowever, its effectiveness is much more dubious when prices rise for other reasons, such as higher energy prices.

If the economy falls sharply, and with demand, the same effect is produced without necessarily raising interest rates. Thus, the maximum that rates will reach will depend on the supply of Russian gas and the persistence of inflation, strongly conditioned by the war in Ukraine, and the severity of its impact on activity. The perfect storm for central banks continues.